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Bonds round-up: Gilts rise after rate cut

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Date: Thursday 10 Apr 2008

LONDON (ShareCast) - Gilt prices reversed earlier losses to rise after the Bank of England dropped its base rate to 5%, its lowest level since January 2007.

Monetary Policy Committee members will hope the move softens the blow of the credit crunch and boosts consumer sentiment, battered by tight credit markets and falling house prices.

The decision to cut rates for the third time in five months comes as forecasters turn increasingly downbeat on Britain's economic growth prospects for the next few years.

The CBI has cut its expectations for growth this year by 0.2% to 1.8% and to 1.7% for 2009, with higher food and fuel prices also likely to send inflation higher.

The employers' lobby group said that at the same time as the economy slows, inflation is due to peak at 3.2% in the third quarter of 2008, up from previous predictions of 2.7%.

It expects rates to fall as low as 4.5% in 2009.

The yield on the 10-year gilt fell 3 basis points to 4.48%.

Government bond prices in mainland Europe were also on the rise after the European Central Bank (ECB) held its reference lending rate unchanged.

The interest rate decision was a foregone conclusion, but comments after the announcement by ECB president Jean-Claude Trichet added to the demand for the safety of government debt. Trichet opined that that the current turbulence in financial markets could extend beyond earlier expectations “and have a broader than expected impact”.

The yield on the 10-year bund fell 2 ticks to 3.99%.

On the other side of the pond, US treasury prices fell back as investors turned their attention to equity markets.

The US Treasury is due to sell off $6bn of inflation-linked debt today.

The yield on the benchmark 10-year treasury note rose 3 basis points to 3.57%.