British gilts and short sterling futures nudged lower on Monday, with prices adrift after a strong dollar rebound took the shine off sterling-denominated assets. Sterling steadied above a two-week low against the dollar, which had also struck a near-three-week high against the euro after months of heavy selling. But the greenback pared gains and there was little else to move bond prices. "We've picked up from where we opened and I think that is on the back of the currency, there have been some sellers in dollars", said a trader at a European bank.
Sentiment was also dampened by comments from Bank of England Monetary Policy Committee member Kate Barker, who was quoted by a newspaper as saying economic prospects in Britain are looking their best in a decade. By 1255 GMT, the 10-year gilt yield had fallen a basis point to 4.84 percent. The March long gilt contract was unchanged at 108.37 while the equivalent short sterling contract shed one tick to 95.76. The 10-year gilt/Bund spread was steady at around 77 basis points. Economic calendars in the UK and the U.S. are bare on Monday. The market will focus on Federal Reserve Chairman Alan Greenspan who talks at 1415 GMT on household debt.
LOOKING AHEAD TO LINKERS
The longer end of the market continued to cheapen ahead of an auction of 600 million pounds of 2.0 percent index-linked gilts maturing in 2035. Deutsche Bank bond strategist Andrei Pogudin said he expected the index-linked gilts to be well-received. "There is a huge stimulus in the economy which may generate inflation down the road, therefore index-linked bonds offer you good protection," he said. He added that new solvency regulations affecting insurance companies might lead them to switch their assets from equities into fixed income securities and index-linkers. The gilt curve has become inverted since July last year in the wake of new regulations which were discussed last year and are expected to take effect later this year. The new solvency rules will require life insurance companies to use more strict risk-based approaches to determine capital requirements -- a move which analysts believe could force the companies to buy more long-dated bonds. "The front end doesn't seem to offer much value for investors at the moment," a trader said, referring to two-year paper . "It is only about 30 basis points away from base rates at the moment, there will be more interest in the long end of the curve over the next couple of weeks." //