Macroeconomic News

By Patrick Graham

LONDON, Jan 10 (Reuters) - A surprise decision on how

inflation is calculated dominated trade in British government

bonds on Thursday, driving yields on inflation-linked paper to

record lows and adding to weakness for conventional fixed-rate

gilts.

Britain's top statistician unexpectedly rejected major

changes to the Retail Price Index in an announcement at the

start of the trading day, heading off moves that could have

significantly cut the reported rate of inflation and with it

future returns to holders of index-linked bonds.

That drove a 35-basis-point dive in yields for 10-year

linkers, and any hope that the relief would also aid demand for

fixed-rate bonds quickly evaporated.

'This decision had huge ramifications for the

inflation-linked market,' said Shahid Ladha, strategist with BNP

Paribas.

'It was a huge move up for them. And bottom line in

portfolio terms it will tend to be 'sell a nominal to buy a

linker'. They (the fixed rate and inflation-linked markets) are

linked and it did have an impact.'

The March long gilt future settled at 116.20, 66

ticks down on the day while 10-year gilt yields rose around 7

basis points to 2.09 percent.

The real yield on 10-year linkers by contrast

slumped 34 basis points on the day to -0.965 percent, after

touching a record low of -0.974 percent.

Conventional fixed-rate gilts also took a hammering from a

stronger-than-expected auction of Spanish debt which drew funds

out of Europe's top-rated government bonds. News that the

European Central Bank had been united in opposing a further cut

in interest rates this month also prompted moves out of

traditional safe-haven plays.

The market was unmoved by the Bank of England's decision, as

widely expected, to hold fire on policy but traders said the

evaporation of hopes for more bond-buying by the bank is at the

heart of a bearish short-term outlook for gilts.

The relative failure so far of Britain's own efforts to

retrench public finances are also weighing on its bonds.

'Going forward there are concerns over forthcoming supply,

the risks of a (rating) downgrade and any fiscal noise around

the time of the March budget,' said Simon Peck, strategist at

RBS in London.

'But it is the lack of further QE and the slightly

encouraging signs from the BoE's credit survey that are the

drivers for the moment.'



* March gilt future 116.20 (-0.66)

* March short sterling 99.48 (UNCH)

* June short sterling 99.45 (-0.02)

* 10-year yield 2.09 percent (+7 bps)



--------------------- KEY MARKET DATA---------------------------

Long Gilt futures Gilt benchmark chain

Short Stg futures Cash market quotes

Deposit rates Sterling cross rates

UK debt speedguide

--------------------KEY MARKET REPORTS--------------------------

Gilts Sterling

Euro Debt Dollar

U.S. Treasuries Debt reports

-------------------- GILT STRIPS DATA --------------------------

Gilt strips data All gilt strips

Gilt strips IO Gilt strips PO

A list of all the strippable British gilts



(Reporting by Patrick Graham and Olesya Dmitracova; editing by

Ron Askew)

Keywords: MARKETS BRITAIN GILTS/MIDSESSION

(olesya.dmitracova@thomsonreuters.com)(+44 20 7542 8051)(Reuters Messaging: olesya.dmitracova.thomsonreuters.com@reuters.net)

COPYRIGHT
Copyright Thomson Reuters 2013. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.