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Bonds round-up: Huge issuance programme hits gilts

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Date: Wednesday 12 Mar 2008

LONDON (ShareCast) - US treasuries bounced back strongly today from yesterday’s losses which were inspired by the Federal Reserve's massive injection of cash into the banking system.

Having had a day to ponder the ramifications of the Fed’s move, traders are betting that the increased liquidity will not prevent financial companies from suffering further crippling write-downs, and consequently the safety of government debt regained its appeal.

As if to give credence to this view, New York-based hedge fund Drake wrote to its investors today to say it is contemplating winding down its $3bn Global Opportunities Fund “in an attempt to maintain and maximize value for investors.”

The yield on the benchmark 19-year treasury note fell 6 basis points to 3.53%.

In Europe government bonds edged higher, with the yield on the benchmark 10-year bund falling 2 basis points to 3.77%, despite French inflation data today which showed the inflation rate in February stuck at 3.2% in February, well above the European Central Bank’s target rate of 2% for the euro region.

Industrial production in the euro region climbed 0.9% in January after showing no change in December.

Over in the UK attention was focused on the Chancellor of the Exchequer’s first budget but it was news from the Debt Management Office (DMO) which most affected the market.

The DMO said the gilt issuance remit for 2008/9 will be £80bn, compared to £58.5bn in 2007/8. The figure exceeded expectations by some £20bn and the high amount can be partially explained by the £14bn loan issued to find the Northern Rock assimilation.

The DMO said the bulk of the increase will come from short-dated issues, with £25bn to be offered over 7 auctions, compared with £10.1bn in 2007/8.

The price of the 2-year gilt slumped, bumping up the yield by a massive 20 basis points to 3.98%. Meanwhile, the yield on the 10-year gilt rose 7 basis points to 4.42%.