Gilts lose shine after central bank action

LONDON Thu Dec 1, 2011 5:54pm GMT

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LONDON (Reuters) - Gilt futures fell for a second day on Thursday as their safe-haven status dimmed after the ECB signalled stronger action to solve Europe's debt crisis and global central banks announced emergency measures to bolster the financial system.

Strategists said a modest rise in the appetite for riskier assets helped to lift leading British shares by 0.50 percent and eroded the appeal of UK government debt.

The yield on benchmark 10-year gilts had fallen below German Bunds several times during November, an unusual move that suggested investors saw gilts as less risky than German debt.

Near-record low yields, signs of progress on the euro zone crisis and dire warnings from British finance minister George Osborne this week about the need for more government borrowing for years to come have dented demand for gilts, analysts said.

A 3 billion pounds auction of 10-year gilts due 2021 which attracted bids worth 1.61 the amount on offer was seen as disappointing. The bid-to-cover ratio compared with 1.76 the last time it was sold on October 4. Analysts said the price tail of 8 ticks was also a sign of poor quality demand.

"What it's fallen victim to is the success that Mr Osborne was crowing about the other day: 'We can fund at cheaper levels than Germany'. Well, for how long?" said Marc Ostwald, strategist at Monument Securities.

"The big problem is that there has been a colossal unwind of some of the flows that have been into gilts out of the euro zone. They are suffering along with Treasuries as a result of that."

At 12:49 p.m., March gilt futures were 52 ticks lower on the day at 112.98, having fallen as low as 112.42 earlier in the session. German Bund futures were 21 ticks higher.

European Central Bank President Mario Draghi signalled that it was ready to take further action to fight Europe's debt crisis if political leaders agree next week to tighter euro zone budget controls.

Smooth government bond auctions in Spain and France also helped to lift risk appetite, although Monument's Ostwald cautioned that markets would remain "very, very choppy" in the coming weeks.

"It's not really a risk-on rally, it's people looking to capitalise on the better returns you get in any other asset class than safe-haven government bonds," he said.

In the cash market, 10-year UK bond yields were 5 basis points higher at 2.368 percent, widening the spread over Bunds to around 10 basis points.

Bank of England Governor Mervyn King said on Thursday that gilts had been supported recently by its 275 billion pounds asset purchase programme, the government's fiscal consolidation and the fact that Britain is not part of the euro zone.

"Creditors and debtors are in it together and we are not in that position in the euro area, that's immensely fortunate for us," he told a news conference after publishing the central bank's twice-yearly financial stability report.

(Reporting by Peter Griffiths; editing by Ron Askew)

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