LONDON: Gilt futures closed at a one-week low on Friday after a broad rally in riskier assets as investors bet on a deal to resolve the euro zone's debt crisis in the coming days.
The looming launch of a new 50-year index-linked gilt was also weighing on the gilt market, particularly at the long end, counteracting some of the boost that might otherwise have come from better-than-expected public finances data.
The December gilt future settled 63 ticks down on the day at 127.56, its lowest closing price since last Friday, when it ended the week at 126.98.
The fall was broadly in line with the 76-tick drop suffered by the December Bund as European share prices rose by 2 percent on the day. Futures trading volumes were about a third below the average for the month as investors awaited the outcome of this weekend's EU meetings.
"It's been choppy and volatile this week," said Sam Hill, gilts strategist at RBC. "We don't want to travel too far from here until we've got more information about what's going to happen at the weekend. People don't want to enter into new risk positions," he added.
After bouncing off a six-week low of 126.39 on Monday, gilts have largely traded within a narrow 100-tick range, due to uncertainty about whether France and Germany will agree a deal to make Greece's sovereign debt burden more manageable.
Gilts extended losses late in the Friday session after US Treasuries fell on the prospect of a debt deal, despite the fact that France's push to use more European Central Bank money to fight the euro zone debt crisis ran into strong resistance from Germany.
LINKER LAUNCH
Aside from the EU summit, the main event next week will be the launch via syndication of the new 2062 index-linked gilt, which will carry a coupon of 0.375 percent.
Hill said that he expected there would need to be a significant concession in the price of the linker to attract investors, partly because the Bank of England's purchases of conventional gilts under its quantitative easing policy were causing investors to favour that sector.
"What's probably required is an outright concession in real yield levels for that issue to be absorbed. Real yields are incredibly low," he said.
However strategists at Lloyds predicted good demand in a note to clients earlier on Friday, expecting the gilt to offer a yield of 1-2 basis points over the 2055 index-linked gilt , which yields 0.39 percent in real terms.
The looming sale also depressed prices of medium and longer-dated conventionals.
Ten-year gilt yields were up 8 basis points on the day at 2.535 percent , 30-year yields were up a similar amount at 3.46 percent while five-year yields were only 3 basis points higher at 1.40 percent.
Versus Bunds , the 10-year gilt yield spread was 1 basis point tighter on the day at 43 basis points.
Lower borrowing in September, helped by solid tax growth and flat spending, kept Britain on track to meet the government's deficit reduction target halfway through the financial year, but a weakening economy clouds the outlook for public finances for the rest of the year.
"You'd have to say that the government is pretty much on track after six months to meet its target. But we would caution against extrapolating that trend into the second half of the year," said RBC's Hill.
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