LONDON: Ten-year gilts hit a one-month low on Friday as part of a global downward move in safe-haven assets on the prospect that Greece would reach a deal with private-sector investors to avoid a chaotic default.
The looming prospect of a syndication of several billion pounds of 40-year gilts next week also weighed on long-dated British government bond prices, as they fell back sharply from all-time highs struck on Wednesday.
The March gilt future settled 54 ticks down on the day at 115.79, its lowest close since Dec. 15, and 10-year yields touched a session high of 2.136 percent, a level last seen on Dec. 21 and well off Wednesday's record low of 1.917 percent.
On the day, 10-year yields were 7 basis points higher at 2.12 percent, and the spread versus Bunds was a shade tighter at 18 basis points.
"It's primarily driven by the idea that there'll be something good on Greece," said Monument Securities gilts strategist Marc Ostwald.
Sources close to the negotiations told Reuters that Greece was closing in on a deal with private bond holders that would prevent it from tumbling into a default but cost investors up to 70 percent of the value of their loans to Athens.
Nonetheless, a Greek deal is unlikely to trigger a full-scale exit from safe-haven assets, Ostwald said.
"Does anyone think there will be hordes of money leaving the UK as it's been used as a safe haven? No. Will the Greek problem really go away? Absolutely not. They still haven't got a sustainable debt level."
As well as the Greek negotiations, gilt investors will be focusing on the DMO's syndication of the 2052 gilt next week, which Ostwald said would probably occur on Tuesday.
"The long end has been distinctly suffering because people are building in a concession on the back of the 2052 syndication next week," he said, adding that underperformance was most noticeable versus index-linked gilts of a similar maturity.
Given that - and the fact that the syndication offers a rare opportunity for fund managers to buy significant volumes of ultra-long debt - Ostwald expected the DMO was hoping to sell 4-4.5 billion pounds of debt.
The DMO aims to raise 8 billion pounds across next week's syndication and its last syndication of the 2011/12 financial year, which takes place in the second half of February.
Next week also brings some major British data, including public finances on Tuesday, and on Wednesday the BoE's January policy minutes and the first estimate of fourth-quarter GDP, which may dip into contractionary territory.
The minutes and speeches by BoE policymakers including Governor Mervyn King will also be key in confirming market expectations for a further 50 billion pounds of quantitative easing next month - a prospect currently supporting gilts.
Copyright Reuters, 2012
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