UK gilts slice losses after stocks fall

LONDON: Gilt futures were broadly steady on Thursday, paring earlier losses as stocks weakened, and outperforming Bunds, helped by investors' view that British bonds offer a safe haven from euro zone sovereign debt worries.

By 1112 GMT the September gilt future was 7 ticks up at 128.88, compared to a fall in the equivalent Bund future and after rising more than 2 full points on Wednesday.

The spread between 10-year gilts and Bunds narrowed by some 3 basis points to 26 basis points.

"If you look at the gilt moves in the last week, they are very much in line with what you've seen on global stock markets," said Francis Diamond, strategist at J.P. Morgan.

"If stocks stabilise, yields will stabilise and if stocks rally a bit from the bottom, I think you'll see gilt yields pushing up, so that correlation is going to stay with us."

French banking shares fell sharply on Thursday, adding to a hefty sell-off in the previous session on growing concerns about their outlook and briefly erasing early gains in European stocks.

Gilts rebounded from a session low of 128.22, touched around the time of the sale of 825 million pounds ($1.33 billion) of 0.625-percent index-linked 2042 gilts.

The auction by Britain's Debt Management Office was covered 1.85 times a ratio that analysts said was in line with their expectations.

In the cash market, yields on 10-year gilts was little changed at 2.49 percent, just off the record low plumbed on Wednesday, when they posted their biggest daily fall since quantitative easing was first announced in Britain in March 2009.

The Bank of England (BoE) cut its growth forecasts on Wednesday and said the rate of inflation would fall rapidly in 2012.

Comments by BoE Governor Mervyn King strengthened the view that British interest rates will stay at record lows well into next year, and that more quantitative easing might be considered if the economy continues to suffer.

Copyright Reuters, 2011