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Bonds round-up: Profit taking trims gilts' gains

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Date: Wednesday 19 Mar 2008

LONDON (ShareCast) - US treasuries had a mixed day today after yesterday’s sharp losses. Speculation that the Federal Reserve is running out of room to cut interest rates further helped push two-year treasuries lower, but longer dated notes did better on hopes that less aggressive rate cuts will reduce the inflation risk.

The gap between the yield on two and ten year notes remained virtually static, as the yield on the benchmark two-year note rose 5 basis points to 1.66%, while the yield on the benchmark ten-year note fell 5 basis points to 3.44%.

European government bonds retreated with the prospects of a cut in interest rates this year becoming remoter, as the European Central Bank continues to focus on taming inflation.

The yield on the benchmark ten-year bund rose 2 basis points to 3.78%.

In the UK, gilts had a volatile day. They opened lower, but then advanced strongly as rumours circulated that the Bank of England was offering emergency assistance to a cash-strapped financial institution, with HBOS touted as the most likely candidate.

Vigorous denials from the Bank of England and HBOS sparked a round of profit-taking and by mid-afternoon gilts were only moderately higher.

News that two members of the Bank of England’s Monetary Policy Committee had voted in favour of cutting interest rates again at the March meeting gave a boost to sentiment.

Deputy Governor John Gieve, responsible for financial stability, and perennial “dove”, David Blanchflower, both wanted a quarter point reduction in borrowing costs to 5% in order to soften the blow of the credit crunch.

Minutes from the March 5-6 meeting, published this morning, revealed that most policymakers were concerned about the impact another drop in rates would have on inflation.

A report yesterday showed annual CPI inflation running at 2.5% in February, a nine-month high, and the fifth month in a row that it’s been above the government’s 2% target.

The yield on the benchmark 10-year gilt fell one basis point to 4.35%.