Ten-year gilt yield at new low in wake of Italy sale

LONDON: The yield on 10-year gilts slid to a fresh record low on Thursday, as investors sought the relative safety of British bonds in the wake of a debt auction in heavily-indebted Italy.

Italy's borrowing costs fell from record highs at the sale, but cautious investors still demanded a near 7 percent yield to buy 10-year debt.

Such high costs keep intense pressure on the euro zone's third-largest economy as it heads towards a refinancing hump early next year, and traders said the European Central Bank stepped into the open market after the auction to buy Italy's bonds in a bid to hold down yields.

"That's definitely triggered a risk-aversion move," Sam Hill, strategist at RBC Capital Markets, said of the Italian auction. But he added that thin holiday markets tended to exacerbate small price moves.

The yield on 10-year gilts was 5 basis points down at 1.968 percent after falling below 1.960 percent earlier in the session. The spread against equivalent Bund yields stood largely unchanged at 11 basis points.

The March gilt future settled 55 ticks up at 117.06, having reached a new contract high of 117.14, slightly underperforming the equivalent Bund future.

QE SUPPORT

Gilts were set to be propped up by the Bank of England's asset purchases, which resume next week after a two-week break.

RBC's Hill noted that the central bank was set to buy another 24 billion pounds' worth of gilts before its February policy meeting. "That's clearly going to be supportive for the market," he said.

Gilts were the clear outperformers among government bonds this year with total year-to-date returns of 16 percent , bolstered by the BoE's quantitative easing programme and the government's perceived fiscal prudence.

The central bank, which started injecting an additional 75 billion pounds into the economy in October, sees Britain stagnating until the middle of next year. Some policymakers have warned the economy may shrink in one or two quarters as the euro crisis weighs on confidence and consumers cut back spending.

Many economists therefore expect another cash boost by the BoE in February, keeping the outlook for gilts bullish.

"Next year they are going to remain relatively supported compared to other triple-A assets, just because of prospects of more QE, especially at the long end," said Vatsala Datta, strategist at Lloyds.

Providing a cue for gilt investors early on Friday, mortgage lender Nationwide will release data expected to show that growth in British house prices slowed in December both on a monthly and a yearly basis.

Copyright Reuters, 2011