Gilts hit after Bank of England holds fire on QE

LONDON: British government bonds tumbled on Thursday after the Bank of England decided not to restart its gilt buying programme, wrongfooting many who had expected more stimulus.

June gilt futures fell 50 ticks on the verdict and extended losses after surprisingly robust US labour market data to stand 74 ticks lower at 1345 GMT.

Disappointing economic news and dovish rhetoric from the central bank had led to the market pricing a 50:50 percent chance of more QE from the BoE this week.

Long-dated gilts bore the brunt of the losses. The BoE has indicated it will not buy more than 70 percent of any gilt and since it is already close to that limit in several medium-dated gilts, further buying was expected to be concentrated in longer maturities.

"There's a lot of disappointment that the BoE didn't do anything, particularly at the long end of the curve," said Nick Stamenkovic, bond strategist at Ria Capital Markets.

The curve had steepened markedly with 2-year gilt yields up 3 basis points at 0.25 percent, 10-year gilt yields up 8 basis points at 2.03 percent and 20-year yields 9 basis points higher at 2.98 percent.

The yield spread between 10-year gilts and Bunds widened by 4 basis point to 55 basis points as UK government bonds underperformed.

Still, some took the view that more quantitative easing may have simply been postponed.

Britain's economy is at risk of tipping into its third recession in four years and, with fiscal policy hamstrung by the government's austerity drive, monetary policy has to do the heavy lifting.

Prime Minister David Cameron insisted on Thursday that he would not water down his deficit-cutting pledge and that the Bank of England had an important role to play in getting the economy growing again.

A front-page Financial Times story that the government could change the central bank's remit added to the impression that fiscal policy would stay tight and monetary policy loose.

In practice, the BoE is already adopting a flexible interpretation of its remit -- which is to target inflation at 2 percent on a two-year horizon -- so tweaks to the wording may make little difference.

Alongside its monetary policy announcement, the BoE also gave details of how it would reinvest 6.6 billion pounds of proceeds from the redemption of the March 2013 gilt. It said proceeds would be evenly split between its existing three maturity baskets -- 3-7 years, 7 to 15 years and 15+ years.