Bonds

Wednesday June 18, 10:29 AM
Gilts fall after BoE minutes show MPC considered rate hike at June meeting

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LONDON (Thomson Financial) - Prices of UK gilts fell after the minutes to the Bank of England's latest Monetary Policy Committee meeting showed that the rate-setting body considered raising interest rates.

The minutes revealed

an 8-1 vote in favour of leaving interest rates on hold at 5.00 percent, with only arch dove David Blanchflower opting for a rate cut.

The majority of the nine-member MPC (A050540.KQ - news) , however, felt that the upside risks to medium-term inflation had increased in recent months and there was no case for a rate cut. For some, the news had even been sufficient to consider a rate rise, as delay would only increase the eventual costs of bringing inflation back to target.

'The fact that the case for a rate hike was even discussed will keep the market's nerves jangling,' said Jonathan Loynes at Capital Economics.

The news caused gilts to reverse some of Tuesday's gains after a letter from BoE governor Mervyn King to the Chancellor of the Exchequer -- triggered as annual CPI (NYSE: CPY - news) inflation rose by more than one percentage point above the BoE's 2.0 percent target -- dampened market expectations for a rate hike.

Although King conceded that inflation will run above target well into 2009 and that he expects to write several more letters over the next year, he warned that hiking rates now could put the economy at risk.

John Ratcliffe at Thomson IFR Markets noted, however, that gilts quickly reversed some of their losses, with Tuesday's letter from King considered to carry more weight than Wednesday's minutes.

'Yesterday's tone takes precedence. Gilts are still reasonably well supported and we've seen some buying on dips,' he said.

Meanwhile, European government bonds were steady amid a dearth of data.

German government bonds were underperforming other European issues, however, pressured ahead of an auction of 5 bln euros in 5-year benchmark Bobls.

Ratcliffe also noted that there has been a trend towards tighter sovereign spreads as volatility in the market has decreased, with Italian and Greek bonds outperforming.

At Yield Change on

0903 GMT pct previous close

Sept euribor future (Liffe) 94.845 up 0.01

Dec euribor future (Liffe) 94.695 up 0.025

GERMANY

Sept bund future (Eurex) 110.25 up 0.05

4.25 pct July 2018 govt bond 97.13 4.61 dn 0.13

FRANCE

4.00 pct April 2018 govt bond 93.93 4.78 up 0.01

ITALY

4.50 pct Feb 2018 govt bond 95.74 5.13 up 0.07

Sept gilt future 104.42 up 0.10