LONDON: Gilts edged down on Wednesday after trading in a tight range for most of the session as markets were gradually returning to business-as-usual after Christmas and New Year holidays.
British government bonds pared some of their early losses in the wake of a successful auction of five-year gilts, with good cover ratio at a Bank of England buyback supporting the move.
The auction of 3.75 billion pounds of 1.75 percent 2017 gilts drew bids for 2.02 times the amount on offer, well above the weak level of 1.27 achieved nearly three weeks ago when the gilts were sold into a pre-Christmas lull.
The solid auction result helped gilt futures temper losses and even make forays into the black.
"The low of the day was around the auction and we've traded pretty firmly since then. The auction was a decent one," said Moyeen Islam, strategist at Barclays Capital.
Analysts had expected robust demand for the bonds as the Bank of England's purchases of 1.7 billion of three- to 10-year gilts on Tuesday was seen outweighing any headwinds posed by poor demand at the previous auction, which was largely blamed on a Christmas break in BoE asset purchases.
Elisabeth Afseth, fixed-income strategist at Evolution Securities, said after the auction that the gilts also benefited from their safe-haven status and the fact that more money was available for investing in January.
The March gilt future settled 15 ticks down at 116.32, broadly in line with the equivalent Bund contract . The gilt future had traded in a narrow range of around 30 ticks for most of the session.
The Bank of England said it received offers totalling 1.80 times the 1.7 billion pounds' of gilts with a maturity of 10-25 years it offered to buy in the second half of the session as part of quantitative easing (QE).
Bunds were also boosted after Germany's sale of 10-year bonds found better demand than in November, when a poor first auction of the same paper raised fears the euro zone debt crisis was spreading to its strongest economy.
"It's been a reasonably quiet day. It still feels like the market is a little bit in holiday mode, liquidity is likely to pick up next week," Barclays Capital's Islam said.
GILTS IN DEMAND
In a sign of strong underlying appetite for gilts, Bank of England data showed on Wednesday that foreign investors -- who unlike many domestic investors are not obliged to buy gilts -- increased their gilt holdings by 16.3 billion pounds in November, the largest monthly rise since September 2008.
Citi strategists wrote in a note that the Bank of England's gilt purchases remained a key support. "After the expiry of the current round of 75 billion pounds of QE2 (end of January), we expect further buying by the BoE."
"This is the crucial and somewhat distinctive feature of the UK bond market: with the central bank acting as a credible and large backstop, we believe yields, especially in the longer end, can and will move lower still in the months to come," they said.
In the cash market, the yield on 10-year gilts was around 2 basis points up at 2.05 percent, with the spread against Bunds broadly steady at 13 basis points.
Investors' attention on Thursday will turn to the services PMI, expected to show that growth in Britain's dominant service sector slowed in December. A surprise contraction in the sector would raise chances of another recession in Britain.
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