LONDON: Ten-year gilt prices suffered their biggest one-day fall since December on Tuesday, after a 5 billion pound gilt sale and an equivocal Bank of England stance on asset purchases compounded losses caused by improved prospects for a Greek debt deal.
The yield on the 10-year gilt jumped by 10 basis points on the day to 3.27 percent, and the September gilt future tumbled 83 ticks to a one-week closing low of 121.43.
Gilts heavily underperformed German government bonds, even though the latter were also having a bad day as European banks appeared to be moving closer to an agreement to reschedule their Greek government bond holdings.
The future lost almost half a point more on the day than the equivalent Bund contract , and the yield spread between 10-year gilts and Bunds widened by 7 basis points to peak at 34.4 basis points at 1515 GMT, the highest level reached during normal trading hours since early April.
"I think fundamentally it's a combination of problems," said Marc Ostwald, strategist at Monument Securities. "We've been outperforming for a while, and now there are hopes for a Greek deal. It suddenly becomes crystal clear just what a dodgy safe haven we have."
Gilts and Bunds have both attracted inflows from investors worried about a Greek government default. But sources told Reuters on Tuesday that German banks had agreed to use a proposed French model for rescheduling Greek debt as a basis for talks to ease the southern European country's debt burden.
However, it was not just Greece which weighed on gilt prices. The UK Debt Management Office sold a hefty 5 billion pounds of ultra-long 2060 gilts via syndication. It attracted a healthy price for the gilts, which are hard to buy on the open market and are coveted by index-tracking funds, pension funds and insurers.
But Ostwald warned that this might represent a last hurrah of investor appetite for gilt sales.
"It's probably a one-off. It soaked up a lot of the duration-lengthening pressure that there may have been."
Meanwhile, testimony by Bank of England policymakers to a parliamentary committee failed to support hopes of more quantitative easing (QE) in the way that the unexpected reference to asset purchases in June's policy minutes last week had done.
While external Monetary Policy Committee member David Miles outed himself as one of the policymakers who had flagged more QE as a future option, Deputy Governor Paul Tucker -- who rarely speaks on monetary policy -- said the MPC was not moving uniformly in that direction, and he himself was sceptical.
Short sterling rate futures were down as much as 10 ticks on the day, reflecting diminished expectations of ultra-loose BoE policy past the middle of 2012. Ostwald said that technical factors had also made the contracts look overvalued compared to BBA LIBOR sterling interbank rates.
There was little gilt market reaction to unrevised first-quarter GDP data, which also showed the biggest year-on-year fall in household disposable income since 1977. But weak current account data, along with the Greek developments, did push sterling to a 13-month low on a trade-weighted basis .
Wednesday will see the release of the BoE's May consumer credit and mortgage data, which is forecast to show continued sluggish lending growth, as well as April services output data, which is expected to have been distorted by a boost to retail sales from the Royal Wedding.
Copyright Reuters, 2011
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