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Markets

Gilts track Bunds, Tsys up on Fed low rates pledge

LONDON: British gilt futures rallied on Thursday, taking their cues from Treasuries after the US Federal Reserve indicat
26 Jan 2012

imaszxwertLONDON: British gilt futures rallied on Thursday, taking their cues from Treasuries after the US Federal Reserve indicated it would keep interest rates near zero for another two years and signalled it was ready to inject more stimulus to boost growth.

The US central bank also adopted an inflation target for the first time. Its 2 percent inflation goal is above what it expects the economy could achieve this year through 2014, amid concern over high unemployment and a struggling household sector.

At 0837 GMT, the March gilt future was 44 ticks up at 115.76, in line with the equivalent Bund by 7 ticks.

In the cash market, the yield on ten-year gilts was 5 basis points down at 2.115 percent, leaving the spread against Bunds at around 20 basis points.

Long-dated gilts lagged the rally by around one basis point, continuing their underperformance for a second day as markets digested this week's syndicated sale of almost 5 billion pounds of 40-year gilts.

Analysts said that the dovish tone of the Fed reinforced expectations that the Bank of England would also expand its quantitative easing programme after an unexpectedly sharp contraction in the economic output at the end of last year left Britain on the brink of a fresh recession.

"If they (the Fed) is that worried about the state of the economy, given the numbers we've been getting out of the US, then there's good reason for the BoE to be concerned, which argues in favour of QE and favours long and medium gilts," said Eric Wand, strategist at Lloyds Corporate Markets.

Most analysts reckon the British central bank will expand its gilt-buying programme by a further 50 billion pounds next month, after providing a 75 billion pound cash boost in October.

"If the Fed is that worried about the state of affairs there's going to be an awful lot more QE before the game is over," Wand said.

Gilts are likely to retain their focus on other markets this session, with little on the UK agenda except for the CBI's Distributive Trades retail survey at 1100 GMT, which will give a snapshot of trading conditions in early January.

Copyright Reuters, 2012