LONDON: Gilt futures recovered from a five-day low touched early on Monday and proceeded to tread water after Germany and France said a common euro zone bond was not on the agenda of a meeting between the two countries' leaders set for Tuesday.
The UK market's attention on Tuesday will also focus on July inflation data as a downside surprise like last month could lower the barrier for any additional quantitative easing by the Bank of England.
The September gilt future settled 6 ticks down on the day at 128.21, well off a five-day low of 127.80 hit early in the session. At slightly over 62,000, volumes traded were well under half the levels seen last week.
"It's the first day this month that's felt like an August day," said Andy Chaytor, gilts strategist at Royal Bank of Scotland.
Gilts traded in lockstep with Bunds throughout the session. They fell at the open as shares rose on news of a smaller-than-expected second-quarter contraction in Japan's economy, but then recovered after Germany and France played down prospects for any big deal at Tuesday's meeting.
"We supposedly had a 'risk on' start and were weaker, but having had the latest from (Germany) nixing the idea of the euro bonds, the future has recovered a lot of the ground it lost earlier on," said Marc Ostwald, a strategist at Monument Securities.
Gilts have been seen as a relative safe haven in recent weeks as the euro zone debt crisis has escalated again, with financial markets wanting to see bolder action from euro zone leaders to resolve the crisis, such as an agreement to issue common euro zone bonds.
German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to discuss the debt crisis on Tuesday, but both countries ruled out any discussion about creating a common euro zone bond to aid more heavily indebted countries in the bloc.
Ten-year gilt yields were flat at 2.535 percent, and are well above the record low of 2.460 percent set on Thursday. Versus Bunds , 10-year yield spreads were unchanged from late Friday's level at 21 basis points. Around 0640 GMT -- before trading started in earnest -- the spread touched its lowest since early May at 15.6 basis points, according to Reuters data.
Thirty-year gilts underperformed versus 10-year gilts in last week's rally, but an attempt on Monday to catch up petered out in the afternoon.
"There's limited demand for 30-year gilts at these levels," RBS's Chaytor said.
Market volatility and the August holiday season, as well as yields well below the bottom end of their usual 4-5 percent trading range, were constraining demand from their usual buyers in pension and investment funds, Monument's Ostwald added.
Bank of England policymaker member David Miles, one of the more dovish members of the Monetary Policy Committee (MPC), said in an interview that he saw no case yet for further quantitative easing (QE) but that had little impact on the market.
"The fact ... supports our view that this week's (Bank of England) minutes, published on Wednesday, are likely to show that Adam Posen remains the only MPC member currently voting for such a move," said Barclays Capital economist Chris Crowe.
However, QE bets could get a boost if inflation data due at 0830 GMT on Tuesday shows an unexpected fall, RBS's Chaytor said. Economists polled by Reuters on average see inflation rising to 4.3 percent in July from 4.2 percent in June, with forecasts ranging from 4.1-4.6 percent .
Copyright Reuters, 2011
Comments
Comments are closed for this article.