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Bonds round-up: Gilts surrender early gains

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Date: Wednesday 27 Feb 2008

LONDON (ShareCast) - A late rally by UK equities coincided with an evaporation of almost all of the gains won by gilts earlier in the day.

UK government bonds had initially moved ahead strongly in reaction to the UK economy growing at its slowest rate since 2006 during the fourth quarter of last year.

Preliminary estimates for fourth quarter growth from the Office for National Statistics revealed an unrevised 0.6% increase on the previous three month period.

Although that was in line with expectations it was down on the 0.7% reported for the third quarter.

GDP rose 3.1% for the year 2007 as a whole compared with 2006, the quickest rate of growth since the 3.3% reported in 2004. Fourth quarter GDP was 2.9% higher than a year earlier, as expected.

The yield on the benchmark 10-year gilt was one point lower at 4.7%.

US treasuries were little changed ahead of the $26bn sale of two-year government debt today.

Although sentiment was aided by comments from Federal Reserve Chairman Ben Bernanke that the U.S. central bank “will act in a timely manner” to counter “downside risks”' to the economy, there were concerns that demand for government debt could be affected by the decision to remove restrictions on the sizes of mortgages that government-chartered lenders Fannie Mae and Freddie Mac can make. The move was seen as restoring, somewhat, the appeal of corporate debt.

In Europe, bonds eased a little despite a gloomy report on German consumer confidence. The GfK confidence index for March was unchanged from February’s reading of 4.5, and barely above the 4.4 level in December, which was the lowest since January 2006.

Inflation fears also raised their head as German import prices increased 0.8% in January from December.

The yield on the benchmark 10-year bund rose 1 basis point to 4.09%.