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Bonds round-up: Gilts move higher

Date: Wednesday 10 Feb 2010

Bonds round-up: Gilts move higher

UK gilts rose sharply on the back of news that the economic recovery will be slower than previously expected.

The Bank of England says that GDP growth is predicted to reach 3.2% by 2011, compared with a tentative estimate of 4% in November.

Bank of England governor Mervyn King also suggested it is too early to predict an end to quantitative easing even though the last meeting of the Bank’s Monetary Policy Committee voted to hold the cash injection programme at £200bn.

Inflation will fall below the Bank's 2% target to 1.2% or lower over the next two years, even if interest rates pick up, after peaking at 3.5% early this year.

Two-year yields fell 10 basis points to 1.12%, while ten-year yields are five basis points lower at 3.92%.

Manufacturing output increased 0.9% in December, exceeding forecasts for a 0.4% rise. November's performance was revised up to show a modest gain of 0.2%.

Overall industrial production rose by 0.5% month-on-month in December, but was limited by a 5.5% drop in oil and gas production.

German bunds are going the opposite way to gilts as fears continue about the financial state of many of the eurozone countries. Two-year yields rose one basis point to 1.04%, while ten-year yields are five basis points higher at 3.2%.

EU leaders will address the eurozone’s debt problems at the informal gathering on Thursday, with an aid package for Greece on the agenda, but investors switched attention back to the US and the soaring dollar.

US Treasury bonds are having a mixed day. Medium-dated bonds have fallen in price but longer-dated bonds are higher.

Two-year yields are three basis points higher at 0.86%, while ten-year yields were broadly unchanged at 3.65%.

The December US trade balance widened to $40.2bn. Exports rose $4.6bn to $142.7bn, while imports increased $8.4bn to $182.9bn. Federal Reserve chairman Ben Bernanke said economy still requires support, adding to the unease of the health of the economy. He says that discount rates may be raised "before long".

There is an auction of $25m worth of 10-year bonds today.

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