Gilts Surge On Bank Of England Buying Plan

Gilts Surge On Bank Of England Buying Plan
    By Keith Jenkins    Of DOW JONES NEWSWIRES  

LONDON (Dow Jones)--U.K. government bond prices surged Thursday as the Bank of England detailed its widely expected asset-purchase program. It also delivered the forecast interest rate cut, taking Bank Rate down by 50 basis points to a record low 0.5%.

The gilt market paid scant regard to the rate cut, but reacted dramatically to the Bank's announcement it would implement a GBP75 billion asset-purchase program, known as quantitative easing.

The Bank said it would buy medium- and long-dated gilts in the secondary market, as well as other assets, in an operation the Bank envisaged lasting three months.

Gilt prices soared, and yields plunged, as the announcement confirmed the Bank was embarking on a quantitative-easing policy.

The yield curve flattened significantly as the long-end played catch up. Market participants had been expecting the Bank to target shorter-dated maturities, said John Wraith, gilt market strategist at Royal Bank of Canada Capital Markets.

"The Bank has made it clear its priority is to get yields lower across the curve," Wraith added, noting the Bank has permission from the U.K. Treasury to use a total of GBP150 billion in the program.

"The bank is authorized to buy up to GBP150 billion, of which GBP50 billion should be private-sector assets," said Alan Clarke, U.K. economist at BNP Paribas. "At this stage, the Bank has said it will use GBP75 billion in the first three months. That is an aggressive start and probably more aggressive than most expected and the scope to use another GBP75 billion further down the road."

Simon Penn, market analyst at UBS, said he was surprised a three-month period had been announced, having expected the operation to be stretched out over a longer period to possibly encompass gilt auctions.

The June gilt futures contract spiked higher, marking a session high of 121.65 from around 119.80 at the time of the announcement, before easing to 121.25, up 2.20 on the day.

The yield on the 10-year benchmark gilt dropped to around 3.36% from Wednesday's 3.63%, while the 30-year yield plunged to 4.14% from around 4.50%.

The two-year/10-year benchmark yield spread tightened to 223.0 basis points from Wednesday's 241.0bps, while the 10-year/30-year spread narrowed to 81.0bps from Wednesday's 87.0bps.

Short sterling interest rate futures surrendered early gains as the BOE's 50bps rate cut was seen as the last in the current easing cycle, said UBS's Penn.

In the currency markets, after initially posting small gains on the BOE's widely flagged 50bps rate cut and quantitative easing details, the pound began to slip but then rallied.

With the foreign exchange market seemingly disappointed by both the size and the timing of the planned gilt purchases, sterling fell to $1.4040 from a high of around $1.4120 shortly after the announcement but then recovered almost to pre-announcement levels. EUR/GBP was some 20 ticks higher at 0.8930 but then eased.

-By Keith Jenkins; Dow Jones Newswires; +44-20-7842-9495; [email protected]

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(END) Dow Jones Newswires

March 05, 2009 08:17 ET (13:17 GMT)

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