LONDON: Gilt futures fell to a two-month low on Thursday as Greece moved closer to securing a new rescue package, but short-dated gilts rose after the Bank of England said its latest stimulus would favour them more than in the past.
Greek political leaders clinched a long-stalled deal on reforms and austerity measures that paves the way for a second international bailout to help avert a chaotic default, just hours before the country's financial backers meet in Brussels.
The March gilt future settled 51 ticks down at 114.58 - the lowest closing level in two months and just off a session low of 114.51. The equivalent Bund settled 74 ticks lower.
"The latest drift lower (in gilts) has been partly European-inspired, that's for sure," said Eric Wand, strategist at Lloyds.
Gilt futures and long cash gilts had already come under pressure after the BoE unexpectedly said its latest 50 billion pound injection of stimulus would be spent on shorter-dated gilts than had on average been the case in the past.
The yield on 10-year gilts was 2 basis points up at 2.23 percent, having stood around 4 basis points down before the central bank's announcement at 1200 GMT. In contrast, the yield on four-year gilts was down by 4 basis points towards the end of the session.
The disparity was even more obvious further along the curve, with the yield on 15-year gilts up 10 basis points.
Analysts said the BoE had been struggling for some time to find willing sellers of long-dated gilts, which meant it had to pay above-market prices for these bonds in its weekly reverse auctions.
Long-end gilt supply is relatively scarce and the owners of such bonds, usually pension funds and insurance companies, tend to prefer to hold on to their investments.
"It's always a challenge to buy gilts where the investor base is more 'buy and hold' rather than 'in and out'. The BoE's move reflects the fact that they can't buy indefinitely at the long end of the curve," said Francis Diamond, strategist at JP Morgan.
Sam Hill, a strategist at RBC, said the BoE's move could result in a squeeze in shorter-dated gilts.
"This is an attempt to solve capacity constraints in the middle sector, but it has just shifted them into the short sector," Hill said.
"Investors with a natural habitat in the front end will have a diminishing pool of available gilts in which to invest. The front end is likely to get richer for some time."
On Friday Britain will publish producer prices data, which is expected to show some slowdown in inflation.
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