UK gilts gain ahead of 30-year auction; Fed policy decision remains in focus

The UK gilts gained Tuesday ahead of the 30-year bond auction worth 2.5 billion pounds by the Debt Management Office. Also, investors await the Federal Reserve monetary policy decision and Fed Chair Yellen’s post-statement press conference, in an attempt to estimate the Fed's most likely step.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 2-1/2 basis points to 0.851 percent, the super-long 40-year bond yield also dipped 2-1/2 basis points to 1.452 percent and the yield on short-term 2-year bond slid 1-1/2 basis points to 0.125 percent by 09:00 GMT.

Investors prefer longer-dated bonds, according to minutes released Aug. 23 of a meeting between the debt office, gilt market makers and money managers, with some calling for sales of securities due in more than 50 years. The Bank of England is scheduled to buy 1.17 billion pounds of gilts maturing in more than 15 years via its Asset Purchase Facility, Bloomberg reported.

Moreover, the United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

On Thursday, the Bank of England in its monetary policy meeting decided to leave its official bank rate on hold at 0.25 percent. They also voted 9-0 to keep the Bank's bond-buying programme target at 435 billion pounds and to continue with its new plan to buy up to 10 billion pounds worth of corporate bonds.

Importantly minutes showed that members acknowledged that the economy has fared slightly better than anticipated since the EU referendum. "A number of indicators of near-term economic activity have been somewhat stronger than expected," the Bank said in minutes of the MPC's September meeting.

The Committee now expects less of a slowing in UK GDP growth in the second half of 2016. Central bank staff estimated the economy would grow by 0.3 percent in the July-September period, better than their previous forecast of a slow crawl of just 0.1 percent made in August. Even at 0.3 percent UK Q3 GDP growth would be a half from the second quarter's pace and the BoE reiterated it could well cut its benchmark lending rate further soon.

Members expect that the uncertainty caused by the vote would drag on as UK negotiates its exit from EU. The MPC members noted that surveys since August had shown companies were probably cutting back on business investment, something which would weigh on the economy going forward.

Lastly, investors will also remain keen to focus on the BoE Quarterly Bulletin, BoE FPC Meeting Minutes and BoE MPC Member Cunliffe speech.

Meanwhile, the FTSE 100 traded 0.45 percent higher at 6,844 by 09:10 GMT.