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Markets

Gilts close at 10-day low, looming syndication weighs

LONDON: British gilt futures settled at a 10-day low on Monday after a late share price rally dispelled some concern abo
24 Oct 2011

 LONDON: British gilt futures settled at a 10-day low on Monday after a late share price rally dispelled some concern about Sunday's inconclusive European Union summit, while a looming 50-year index-linked gilt syndication weighed on longer maturities.

Markets will also watch closely Bank of England Governor Mervyn King's testimony to parliament's Treasury Committee on Tuesday about the recent decision to launch another round of quantitative easing.

British share prices closed at their highest level since Aug. 3, lifted by strong data from China's manufacturing sector and much better than expected quarterly earnings from US machinery company Caterpillar .

This caused the December gilt future -- which had been up 20-30 ticks for most of the session -- to suffer a late slide to settle 7 ticks down on the day at 127.49, its lowest close since Oct. 14.

Gilts' underperformance versus German government debt dissipated, though longer-dated gilts continued to underperform 10-year maturities, causing the yield curve to steepen by 2-3 basis points.

"People are still looking towards Europe, that's been impacting. But there's an anticipation that the syndication will happen tomorrow, and there's an interest to see the market at cheaper levels," said Eric Wand, a strategist at Lloyds Corporate Markets.

Book runners for the launch of the 0.375 percent 2062 gilt have not finalised the date for the syndication, which is due this week. Sources close to the transaction say that Tuesday is a strong possibility, though not a certainty.

Wand -- whose bank is not one of the lead managers on the deal -- said that there were concerns liquidity could dry up towards the end of this week, when many British schools are on holiday. Wednesday is potentially tricky due to the EU summit aimed at reaching a final agreement on bank recapitalisation and funds to support heavily indebted euro zone members .

The new gilt is likely to be priced off the 2055 index-linked gilt, which currently has a real yield of 0.46 percent, 7 basis points up on the day. Wand said he expected demand for the new issue to be solid from longer-term investors, while a rise in the yield on the 2055 gilt to 0.50 percent would be needed to attract more speculative money to the new issue.

The gilts market faces two other main events on Tuesday. First is the release at 0830 GMT of second-quarter current account data and some other delayed components of the national accounts, including households' real disposable income.

At 0845 GMT BoE Governor King and his deputy, Charles Bean, will testify to parliament's Treasury Committee about their decision to launch a second round of quantitative easing at the start of the month.

In an interview with the Financial Times published on Monday, Monetary Policy Committee member Ben Broadbent described the economic outlook as "bimodal", with the prospects for more -- or less -- QE dependent on euro zone developments.

Ten-year gilt yields finished Monday 2 basis points up on the day at 2.555 percent, leaving the yield spread versus Bunds 1 basis point wider at 44 basis points. Thirty-year yields were 4 basis points up at 3.496 percent.

Copyright Reuters, 2011