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Markets

Gilts hit one-week high, market braces for EU summit

LONDON: British gilts benefited from a late rally on Wednesday as the market braced for the outcome of this evening's EU
26 Oct 2011

 LONDON: British gilts benefited from a late rally on Wednesday as the market braced for the outcome of this evening's EU summit aimed at recapitalising banks, writing down Greek debt and bolstering the euro zone's rescue fund for indebted countries.

The second euro zone summit in four days, due to start at 1730 GMT, seems unlikely to produce a detailed masterplan despite Franco-German assurances that a "comprehensive solution" to two years of debt turmoil will be found.

The leaders may agree on broad outlines but leave crucial details, including the numbers on a Greek debt write-down and on funds available for financial fire-fighting, for later negotiation among finance ministers.

The December gilt future settled 46 ticks up on the day at 128.43, its highest closing price since Oct. 18, though some way off the eight-day intra-day high of 128.79 touched earlier in the session.

"It's a response to equity market movements," said Monument Securities strategist Marc Ostwald. "Bond markets knew already this morning that whatever they (EU leaders) come up with this evening will be at best ho-hum, at worst disappointing."

Gilts' move higher had been triggered by a dip into negative territory by the US Standard & Poor's share index , he added, though the future rapidly pared gains as European shares resumed their rally.

The gilt future finished the day broadly in line with the equivalent Bund contract , having outperformed by around 40 ticks earlier in the session. Ten-year gilts' yield spread versus Bunds was just 1 basis point tighter on the day at 43 basis points, but had earlier touched a one-week low of 38.2 basis points.

Some strategists had attributed the outperformance to hopes that the low cover ratio at Tuesday's Bank of England buyback of ultra-long gilts would be replicated at Wednesday's reverse auction for 10-25 year maturities, forcing the central bank to offer generous prices to potential sellers.

However, Wednesday's cover ratio of 2.71 was up on the previous week's level of 2.14, indicating a plentiful supply for the BoE to choose from, and Ostwald said that Tuesday's low cover was down to one-off factors.

Nonetheless, RBC strategist Sam Hill said that the limited new issuance planned by Britain for the rest of the year -- when the BoE will be buying the bulk of its 75 billion pounds of gilts under quantitative easing -- still left scope for a rise in price for long-dated gilts.

Ten-year gilt yields were 4 basis points down on the day at 2.47 percent, and 50-year gilt yields were 5 basis points lower at 3.375 percent. Short-dated gilts underperformed, with yields down 2-3 basis points on the day.

Adding to the supportive tone for gilts was the biggest slump in British factory orders for a year, as recorded in the Confederation of British Industry's October survey.

Copyright Reuters, 2011