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Bank of England aid package boosts gilts

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Date: Monday 21 Apr 2008

LONDON (ShareCast) - Gilts advanced strongly today as the market digested the Bank of England’s aid package for the banking system.

Under the scheme, initially for £50bn worth of bonds but with no upper limit, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks, the Bank said today.

Each swap will be for a period of 1 year and may be renewed for a total of up to 3 years. The risk of losses on their loans remains with the banks. The swaps are available only for assets existing at the end of 2007 and cannot be used to finance new lending, added the Bank. During the lifetime of an asset swap, banks will be required to pay a fee based on the 3-month LIBOR rate.

The yield on the benchmark 10-year gilt tumbled 8 ticks to 4.65%.

European bonds were also on the upturn, as investors eschewed equities in the wake of another hike in oil prices.

The revival of the euro added support, as traders postulated that the strength of the common currency would give the European Central Bank scope to cut its interest rates.
The yield on the 10-year bund eased 2 basis points to 4.11%.

On the other side of the Atlantic, US government bond prices eased in the wake of the Bank of England’s aid package which confirms a trend among central banks to see means other than rate cuts to unblock the money markets.

The yield on the 10-year treasury note edged 2 basis points higher to 3.73%.