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Bonds round-up: Central bank action depresses bonds

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Date: Tuesday 11 Mar 2008

LONDON (ShareCast) - The $258bn emergency funding package announced today by five central banks dominated proceedings and prompted a sell-off of government bonds.

US treasuries slumped as the Federal Reserve said it would allow securities firms to place agency and private mortgage debt as collateral against up to $200bn in Treasury Securities. The two-year and five-year maturities bore the brunt of the losses. The yield on two-year notes rose 19 basis points to 1.68%, while the yield on five-year notes rose a similar amount to 2.57%. The yield on the benchmark 10-year treasury note climbed 11 basis points to 3.56%.

In the UK, gilts responded similarly to the Bank of England’s decision to “maintain its expanded 3-month long-term repo open market operations (OMOs) against a wider range of high quality collateral in its scheduled operations on 18 March and 15 April.”

The arrangements are a continuation of the arrangements introduced for the December 2007 and January 200 long-term repo OMOs, with the wider range of acceptable high quality collateral unchanged.

The move came on the same day that the 3-month sterling London Interbank Offered Rate (LIBOR) rose to 5.79188%; LIBOR is the rate at which banks lend to each other.

The yield on the benchmark 10-year gilt rose 5 basis points to 4.34% on a day when investors were already expressing a preference for equities.

European government bonds also retreated on the news. The European Central Bank said it would auction up to $15 billion for a term of 28 days. The yield on the benchmark 10-year bund rose 5 basis points to 3.77%.