Bonds

Wednesday June 18, 04:00 PM
Gilts stay under pressure following BoE minutes, Euro bonds up as equities fall

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LONDON (Thomson Financial) - UK gilts remained under pressure following news the Bank of England's Monetary Policy Committee considered raising interest rates at its meeting on June 5.

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.

Analysts said the minutes, coupled with Tuesday's rise in CPI (NYSE: CPY - news) means the next change in interest rates is set to be higher.

'Throw in the larger-than-expected rise in CPI inflation in May (of which the MPC was not aware) and the chances of policy tightening as soon as August have increased,' said Ross Walker at Royal Bank of Scotland (LSE: 91ID.L - news) .

The news has caused gilts to reverse some of yesterday's gains after a letter from BoE governor Mervyn King to the Chancellor of the Exchequer Alistair Darling -- triggered as annual CPI 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.

Later tonight focus will be on King's annual Mansion House speech to the City of London (LSE: CIN.L - news) , to see whether the monetary policy outlook becomes any clearer.

Meanwhile, European government bonds were slightly higher after Wall Street opened lower, with trade thin amid a lack of euro zone and U.S. data.

German government bonds were under-performing other European issues, however, following an auction of 5 billion euros in 5-year benchmark Bobls.

At Yield Change on

0903 GMT pct previous close

Sept euribor future (Liffe) 94.855 up 0.02

Dec euribor future (Liffe) 94.710 up 0.04

GERMANY

Sept bund future (Eurex) 110.31 up 0.10

4.25 pct July 2018 govt bond 97.13 4.61 dn 0.13

FRANCE

4.00 pct April 2018 govt bond 93.96 4.78 up 0.04

ITALY