Gilts rebound as profit-taking hits peripheral debt

LONDON: British gilt futures rallied on Friday, tracking Bunds as investors took profit on peripheral euro zone debt, and also helped by a jump in oil prices late on Thursday.

The European Central Bank's second injection of cheap three-year loans earlier this week has given a boost to Italian and Spanish bonds, driving down yields to multi-month lows.

But investors cashed in some of those gains on Friday, and the sell-off gathered pace after news broke that Spain had set itself a softer deficit target for 2012 than originally agreed under the euro zone's austerity drive.

"There was some profit-taking in risk markets, so we were seeing higher peripheral spreads and subsequently lower yields on Bunds," said Vatsala Datta, strategist at Lloyds Corporate Markets.

"Spain revised its deficit target upwards, which has triggered a global risk-off move," she added.

Meanwhile, fears of an oil supply disruption from Saudi Arabia pushed crude oil futures above $128 a barrel in late post-settlement trade on Thursday - levels last seen in July 2008. Prices eased back on Friday.

"Yesterday's late jump in crude has spurred renewed thoughts that it could temper the general (economic) outlook," said Eric Wand, also a strategist at Lloyds.

The June gilt future settled 91 ticks up at 115.14, underperforming the equivalent Bund by 15 ticks, and reversing the previous day's losses.

The yield on 10-year gilts was 6 basis points down at 2.15 percent, tightening the spread with Bunds a notch.

Gilts had outperformed Bunds earlier this week, helped by the prospect of almost 40 billion pounds of coupon and redemption money due to flow back into the market next week, but they relinquished those gains as the week progressed.

That fallback partly reflected doubts about whether the Bank of England will embark on a new spree of bond-buying to stimulate the economy after a run of upbeat data and comments from BoE Governor Mervyn King and fellow Monetary Policy Committee member Martin Weale.

The BoE has committed to a total of 325 billion pounds of asset purchases, but a Reuters poll published on Thursday showed economists do not expect the central bank to add more stimulus when the current programme ends in May.

The BoE is expected to leave interest rates on hold at its policy meeting next week, meaning that borrowing costs will have been at a record low 0.5 percent for three years.

* June gilt 115.14 (+0.91)

* June short sterling 99.16 (+0.09)

* 10-year yield 2.154 percent (-6 bps)