LONDON (Reuters) - Gilt futures fell on Tuesday as investors clung to hopes the European Central Bank might move to cap Spanish and Italian borrowing costs, though they posted a smaller decline than Bunds, helped by the Bank of England’s purchase of UK bonds.
Persistent speculation about the ECB’s planned bond-buying programme overshadowed news of an unexpected budget deficit in Britain in July.
The September gilt future settled 46 ticks lower at 119.53, while the equivalent Bund was 62 ticks down.
Ten-year gilt yields were 4 basis points up at 1.709 percent. Their spread over Bunds tightened by 1 basis points to about 15 basis points.
“Yields are getting dragged higher by the move that we’ve seen in Bunds, it’s probably non-gilts related,” said Citi strategist Jamie Searle.
Spanish government bond yields fell, with traders citing a story in Britain’s Daily Telegraph newspaper saying it could confirm German media reports that ECB experts were examining plans to cap Spanish and Italian bond yields.
The central bank had sought to quash speculation of such a plan on Monday.
“The market and we expect the ECB to intervene in the secondary market, whenever there is a Spanish request for assistance,” Lloyds strategists wrote in a market comment, adding that one option would be to cap yield or spread levels.
“However, such a target would clearly not be publicly announced by the ECB. Similarly, the potentially unlimited size of the intervention could also be left undeclared. This is how ECB operates,” they said.
Citi’s Searle added that Bank of England gilt buybacks on Monday, this session and on Wednesday helped British bonds outperform their German counterparts.
Earlier in the session, Britain’s Debt Management Office auctioned off 1.25 billion pounds of 2029 index-linked paper, selling it with a real yield of -0.025 percent.
“Two days ago that bond was trading with a real yield of -8 basis points, the auction has come in at -2.5 (basis points) ... It looks like it was a good auction but it ... required a fairly large concession this morning,” Searle said.
On Wednesday Britain’s Debt Management Office will publish minutes of its quarterly meeting with gilt investors and primary dealers to discuss its issuance plans for the next three months.
“In nominal gilts, we expect a debate on whether a new 30-year (gilt) should be issued in the next quarter,” Barclays strategist Alan James wrote in a note.
“The 2042 can be re-opened by auction once more in the coming quarter, while a 30-year linker is highly likely to feature in November due to index events then. The choice of bond for the September linker syndication will also be discussed, with there likely to be support for an additional 30-year reopening and for the index-linked 2062,” he said.
Editing by Susan Fenton