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Markets

Gilts down on euro zone hopes, QE buyback supports

LONDON: Gilts fell on Wednesday as stocks were boosted by hopes that Sunday's European Union summit will come up with a
19 Oct 2011

 LONDON: Gilts fell on Wednesday as stocks were boosted by hopes that Sunday's European Union summit will come up with a solution to the region's debt crisis, but the slide in British government debt was limited by a Bank of England buyback of gilts.

The BoE announced earlier this month that it would buy 75 billion pounds of assets with newly created money over the next four months in response to a darkened economic outlook.

On Wednesday it received offers totalling 2.14 times the 1.7 billion pounds' worth of gilts, with a maturity of 10 to 25 years, that it had offered to buy in a reverse auction as part of its quantitative easing programme.

"That will have been a factor in the performance of the (gilt) market," said Sam Hill, strategist at RBC Capital Markets. "The Bank have got the best part of 65 billion still to purchase; it does point towards the opportunity for gilts to remain firm in the weeks ahead."

The December gilt future settled 39 ticks down at 128.13, outperforming the equivalent Bund by 10 ticks.

Analysts attributed the outperformance partly to the minutes of the BoE's October meeting, which showed that policymakers considered injecting even more stimulus into the economy than the 75 billion pounds agreed.

That revived expectations the central bank may add to the programme once the current stimulus runs out in February and provided some support to gilts, analysts said.

But the overall trend in government bonds was downward.

"Risk is on in other markets, at least in equities," said Shahid Ladha, strategist at BNP Paribas.

In the cash market, the yield on 10-year gilts was up 4 basis points at 2.47 percent, narrowing the spread against Bunds by 2 basis points to 41 basis points.

The yield on 30-year gilts was up 2 basis points on the day at 3.40 percent.

"The prospect of a flatter curve in the UK is a very real one, because the buying is longer out and the supply is relatively limited in conventionals," Ladha said.

On Thursday, Britain's Debt Management Office will sell 4.75 billion of 1.75 percent gilts maturing in 2017.

"Demand for safe-haven paper remains robust. However, given the uncertainty surrounding the EMU (European Monetary Union) and the fact that the bond looks expensive on a number of measures, we expect the auction to be a tepid one," RBS strategists wrote in a note.

Copyright Reuters, 2011