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Investors Buy Up Bonds as Cyprus Bailout Causes Risk Off Trade

“Treasuries gained for a second day as an unprecedented levy on bank deposits in Cyprus threatened to reignite the euro region’s debt crisis, boosting demand for the safest assets.

Benchmark 10-year yields fell by the most in three weeks after euro-area finance ministers agreed to tax bank deposits in Cyprus to finance part of a 10 billion-euro ($13 billion) bailout for the nation. Moody’s Investors Service said the levy is negative for bank depositors acrossEurope, while Bill Gross at Pacific Investment Management Co. said it moves “risk-on” trades to the back seat. German bunds and U.K. gilts also gained, with German two-year yields falling below zero for the first time in two months.

“The demand today for safe havens is justified as we just don’t know what the outcome in Cyprus will be,” said Michael Markovich, head of global interest-rate research at Credit Suisse Group AG in Zurich. “We continue to be overweight U.S. Treasuries. Elevated risk aversion should persist in the next few weeks.”

The U.S. 10-year yield fell six basis points, or 0.06 percentage point, to 1.93 percent at 7:01 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 rose 17/32, or $5.31 per $1,000 face amount, to 100 19/32. The yield dropped as much as nine basis points, the most since Feb. 25.

Deposit Levy…”

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Italian Bond Markets Beginning to Show Signs of Sovereign Debt Woes Again

“Chinks are showing in the Italian bond market’s resilience to the political stalemate that followed last month’s election.

Backstopped by the European Central Bank’s bond-buying pledge, Italian yields have been relatively steady at levels well below their all-time highs since the February 24-25 vote which left parties deadlocked over how to form a government.

But some potential signs of market stress are emerging.

Italian bonds paying lower rates of interest have outperformed higher-coupon paper of similar maturity in recent weeks – a phenomenon that occurs in times of heightened uncertainty, when investors take defensive positions.

“It is one of the crisis barometers,” said Commerzbank rate strategist David Schnautz. “When you have stress in the system you see certain dislocations, switches in the curve.”

While yields on the two types of bonds are similar, those offering smaller coupon payments are generally cheaper to buy, reducing the potential loss for the investor if the issuer cannot repay its debts.

A sovereign borrower with liquidity problems would also be more likely to delay coupon payments than not redeem the bond at maturity, analysts say.

The discrepancy in price is most visible at the longer end of the Italian debt curve, where the difference between coupons is also wider.

A bond maturing in August 2023 and carrying a 4.75 percent coupon was priced at 101.53 cents in the euro this week, while a November 2023 bond paying a coupon of 9 percent was priced at 134.87 cents in the euro….”

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Spanish Bonds Put in a Tenth Day of Rally Making it the Largest Run Since 2005

Spain’s bonds advanced for a 10th day, the longest run since 2005, after its borrowing costs fell at a debt sale as investors bet the European Central Bank will limit volatility caused by a political stalemate in Italy.

Benchmark Spanish 10-year yields fell to the lowest level since November 2010 after Economy Minister Luis De Guindos said yesterday he expected to see economic growth by year-end. The ECB agreed to an unlimited debt-purchase program to cap borrowing costs of highly indebted euro-area nations in September. Italian bonds climbed for the first time in three days. German bunds rose for a second day after a report confirmed inflation slowed in February.

“We have the ECB backstop and without it we’d be in a more volatile situation,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It’s a supporting factor for the periphery,” he said, referring to the euro bloc’s most indebted members.

Spanish 10-year yields dropped four basis points, or 0.04 percentage point, to 4.72 percent at 11:02 a.m. London time. The 5.4 percent bond maturing in January 2023 rose 0.305, or 3.05 euros per 1,000 euro ($1,301) face amount, to 105.245.

Spain’s Treasury sold 5.83 billion euros of six- and 12- month securities, beating its upper goal of 5.5 billion euros for the sale, the Madrid-based Bank of Spain said. It sold six- month bills at an average yield of 0.794 percent, down from 0.859 percent on Feb. 12. The 12-month securities yielded 1.363 percent, down from 1.548 percent….”

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Long Term Interest Rates Charts Suggest Rates are Turning and Beginning to Rise

“Based upon very long-term charts and commentary from Hoisington Investment Management Company, for some time we have speculated that the 30-year bond rate would continue downward to around 2%. However, the charts are showing strong technical evidence that interest rates may be turning up in the long term.

The  monthly chart below shows bond rates going back to 1948, at which time long bond rates were about 2%. After the 1981 peak, rates have trended downward toward, we assumed, the historical low. Now it appears that the bottom is in and that rates are heading higher.

Note that the monthly PMO has turned up from its second most oversold level in 50 years, and has crossed up through its 10-EMA, rendering a PMO buy signal.

dp1 Are Interest Rates Turning Up?

Zooming in on a 23-year monthly chart we can see a long-term double bottom (2008 and 2012). This compares with the lower PMO low, which sets up a reversal divergence (bullish). We can also see that yield has broken above a declining tops line drawn from the 2011 top…”

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Italian Bonds Rise as EU Relaxes on Budget Requirements

“Italy’s bonds advanced for the first time in three days after European Union finance ministers opened the way for looser budget policies that may support growth.

German 10-year bunds fell as euro-area retail sales increased in January more than economists predicted, sapping demand for the safest assets. Portugal’s 10-year yields dropped to the least in more than a month after EU Economic and Monetary Affairs Commissioner Olli Rehn, in Brussels for a meeting of the bloc’s finance ministers, said the country and Ireland may get more time to repay bailout loans. Global stocks and commodities rallied on bets central banks will continue stimulus measures.

“There’s a more general risk-on sentiment today” driving Italian yields lower, said Chiara Cremonesi, a fixed-income strategist at UniCredit SpA (UCG) in London. “Bunds are weak as well. It could be that this meeting is also having some impact,” she said of the finance ministers’ gathering.

Italy’s 10-year yields fell 11 basis points, or 0.11 percentage point, to 4.77 percent at noon London time after sliding 16 basis points, the steepest decline since Feb. 25. The 5.5 percent security maturing in November 2022 gained 0.885, or 8.85 euros per 1,000-euro ($1,304) face amount, to 106.055.

The EU is considering easier repayment terms for rescue loans to Ireland and Portugal in a bid to ease their exit from aid programs, Rehn said. The nations say they deserve concessions similar to those granted to Greece last year.

Economic Strains….”

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U.S. Treasury Yields Hit 5 Week Lows as Investors Seek Safety

“Treasury 10-year yields touched a five-week low as Italy moved closer to a new election, boosting demand for the safest assets, after an anti-austerity vote last week left Europe’s third-largest economy in political deadlock.

U.S. 10-year notes were little changed after a survey showing China’s services industries slowed last month sent Asian and European stocks lower. Euro-area finance ministers meet in Brussels today to discuss issues including a bailout for Cyprus. In Rome, Stefano Fassina, a top aide to Democratic Party leader Pier Luigi Bersani, said Italy may need to hold another vote this year after passing new electoral laws.

“There are a number of uncertainties like the Italian elections, the issue of Cyprus and these things bring risks to the market,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “This is the context in which bonds normally do well. We are, in the short term, bullish on Treasuries because when you look at the 10-year yield there is still scope for it to fall.”

Benchmark Treasury 10-year yields rose less than one basis point to 1.85 percent at 7:47 a.m.New York time, according to Bloomberg Bond Trader data, after reaching 1.83 percent, the lowest level since Jan. 24. The rate declined 12 basis points, or 0.12 percentage point, last week, the most since the period ended Aug. 31. The price of the 2 percent note due February 2023 fell 2/32, or 63 cents per $1,000 face value, to 101 11/32.

The 10-year rate may reach 1.80 percent in the next few weeks, Lammens said. The yield last fell to that level on Jan. 2, according to data compiled by Bloomberg.

Italian Impasse….”

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Italy Manages to Cover a 6.5 Billion Euro Debt Auction, With Dropping Yields


“Italian government bonds advanced as the nation sold 6.5 billion euros of securities at a sale.

Ten-year yields fell four basis points, or 0.04 percentage point, to 4.86 percent at 10:17 a.m. London time. The rate earlier dropped as much as nine basis points to 4.81 percent.”

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Italian Elections Help U.S Treasury Yield to Fall to One Month Lows

“Treasuries rose, pushing 10-year yields to a one-month low, as polls indicated the euro area’s third-largest economy, Italy, may be left with a hung parliament, stoking refuge demand.

U.S. debt gained as preliminary results from Italian elections show former Prime Minister Silvio Berlusconi may have built a blocking minority in the Senate to deny outright victory to opponent Pier Luigi Bersani. Treasuries remained higher after the U.S. sale of $35 billion in two-year notes.

“The concern is that Berlusconi will take off the austerity measures,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It’s not set in stone, but it’s brought in heavy buying.”

The benchmark 10-year yield dropped five basis points, or 0.05 percentage point, to 1.92 percent at 1:22 p.m. New York time, according to Bloomberg Bond Trader prices, reaching the lowest since Jan. 25. The 2 percent note maturing in February 2023 added 13/32, or $4.06 per $1,000 face amount, to 100 3/4.

Auction Detail…”

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PIMCO and Investco Agree That TIPS are What You Want to Own

“At a time when the bond market expects inflation to stay at about the past decade’s average, the biggest buyers of government debt say they need protection from rising consumer prices as central banks focus on growth.

Pacific Investment Management Co. and Invesco Ltd. say growing central-bank tolerance of inflation means securities with interest or principal tied to consumer prices are the ones to own. Global expectations indicated by the gap between yields on so-called linkers and government bonds reached a 21-month high of 1.70 percent, Bank of America Merrill Lynch indexes show. Economists in Bloomberg surveys forecast consumer-price gains of 2.72 percent in 2013, in line with the 10-year average.

After four years of stimulating economies, central bankers are starting to see signs of accelerating growth, spurring some bond investors to prepare for a rise in yields from record lows. Index-linked securities are favored because sovereign-debt returns are being erased by what little inflation there is.

“There’s an element of central banks, whether they say it or not, being more relaxed about allowing inflation to rise,” Paul Mueller, a London-based fund manager at Invesco Asset Management, a unit of Invesco Ltd. (IVZ), which manages $713 billion, said in a telephone interview Feb. 19. “While I don’t think we are going to see inflation escaping to very high levels, it does make sense to have protection.”

Global Stimulus…”

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Italian Bond Yields Pare Gains Into Elections

Italy’s bonds rose for a second day amid speculation the winner of the nation’s parliamentary election will maintain austerity measures imposed to stem financial turmoil in the euro area’s third-largest economy.

Italian two-year securities fell as the country sold 2.82 billion euros ($3.73 billion) of zero-coupon notes due 2014 as well as inflation-linked bonds due in 2021 and 2026. Pier Luigi Bersani will probably gain a majority in the 630-seat lower house, according to polls published Feb. 8. Challengers include former Premier Silvio Berlusconi, incumbent Mario Monti and Beppe Grillo. Benchmark German bunds were little changed.

We are expecting a rainbow coalition outcome that doesn’t include Berlusconi and that would be acceptable for the market,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “Fundamentally, Italy is in decent shape and as long as we don’t see any divergence from the Monti policies then yields can come down.”

Italy’s 10-year yield dropped three basis points, or 0.03 percentage point, to 4.41 percent as of 10:44 a.m. London time. It earlier fell as much as seven basis points to 4.38 percent. The 5.5 percent bond due in November 2022 rose 0.27, or 2.70 euros per 1,000-euro face amount, to 108.87.

The rate on two-year notes climbed three basis points to 1.70 percent, extending last week’s nine-basis point increase.

Initial estimates of the election result are due after 3 p.m. inRome, when the second day of balloting ends.

Yield Spread

Italy’s 10-year yield difference over similar-maturity bunds may narrow as much as 75 basis points if a center-left coalition is formed, Goldman Sachs Group Inc. strategists Francesco Garzarelli and Silvia Ardagna wrote in a note to clients yesterday. The so-called spread fell three basis points to 284 basis points today….”

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U.K. Gilts Fall While The Pound Rises on German Data

“U.K. government bonds fell, following the biggest drop in 10-year yields since September yesterday, as an improvement in German business sentiment undermined demand for the safest assets.

The pound rose for a second day against the euro after the European Central Bank said financial institutions will repay less of its second round of three-year loans next week than economists estimated, indicating European banks are wary of lending to each other. Sterling headed for a second weekly decline versus the dollar after Bank of England policy maker David Miles said the central bank should increase stimulus….”

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More Negative Muni Trends Expected in 2013

” Meredith Whitney was applauded for her call about the impending doom of the banking sector ahead of the recession, but she has been criticized ever since her call for billions and billions at risk of default in the municipal bond segment. Maybe her call was too bold, but the world of local government finances in the United States faces some of the same problems that the federal government faces. Today Moody’s has issued a report that remains negative on the finances of the local U.S. government sector.

Moody’s new report is called “Outlook for U.S. Local Governments Remains Negative in 2013″ and it says that the outlook for the U.S. local government sector continues to be negative due to revenue constraints and persistent expenditure demands. Moody’s also warned that the weak economic recovery remains a source of many of the ongoing pressures.

Here is about the only bit of good news, or less bad news:

Nearly all rated local governments, however, will manage through another year of stress with no material impact on credit quality, given the sector’s fundamental and unique strengths. More than 99% of ratings in the US local government sector are investment grade.

One warning is here about a trickle-down effect on the cautious side. Moody’s believes that the economic recovery remains sluggish with some bright spots, but the fear is that the looming federal spending cuts may exacerbate what are already weak growth rates.

Local government revenues are expected to remain constrained and budget decisions, along with spending cuts and deferrals, make the situation increasingly difficult. As far as how many downgrades are expected, Meredith Whitney’s gloom of the recent past is still far gloomier than what Moody’s is projecting for the next 12 to 18 months. The report says”

A small number of local governments may face downgrades in the coming year. At greatest risk are entities with accelerating operating costs associated with mounting pension liabilities, outsized exposure to underperforming enterprises, or an elevated reliance on federal employment or funding given the chance of federal spending cuts….”

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Spanish and Italian Bond Yields Fall as They Kick Off More Auctions

“Spanish and Italian bonds advanced as the two nations auctioned a total of 14 billion euros ($18.8 billion) of bills, allaying concern that political turmoil in both countries would damp demand for their debt.

Germany’s benchmark 10-year bund yields were about four basis points from the lowest level in more than two weeks. Italian two-year securities rose, paring a four-week decline sparked by speculation elections this month may fail to deliver a governing majority. Spanish Prime MinisterMariano Rajoy, who faces calls to resign amid contested corruption allegations that he denies, said his People’s Party government last year achieved a significant reduction in Spain’s budget deficit.

“The risky issues have dissipated a bit in Italy and Spain,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “Even if there’s an election result in Italy that’s not the best for markets, we don’t expect it to become a new source of crisis. If there are selloffs, probably there will be investors ready to jump in and buy these assets.”

Spain’s two-year note yield slipped nine basis points, or 0.09 percentage point, to 2.70 percent as of 12:01 p.m. London time. The 2.75 percent security due in March 2015 climbed 0.18, or 1.80 euros per 1,000-euro face amount, to 100.11.

The rate on Italy’s two-year notes fell seven basis points to 1.66 percent. It dropped to 1.275 percent on Jan. 10, the least since April 16, 2010, when it reached a record-low 1.273 percent, according to data compiled by Bloomberg.

Bill Sales..”

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Fed’s Jeremy Stein Warns of Banks and Bubble Risk

“FORTUNE — Bank chief executives have spent the past few months telling investors not to worry about rising interest rates. Most have said their banks are not taking risks in the bond market and are protected from losses.

One Federal Reserve governor doesn’t agree. On Thursday, governor Jeremy Stein became the latest high profile person to publicly worry about what a bond bubble could do to the financial sector and the economy. In a speech at a symposium in St. Louis, Stein talked about how or if the Fed should respond.

Stein sees some areas of concern. He thinks the high-yield bond market might be due for a pull back, and that some mortgage finance companies could be overstretched. But Stein says at least for now a drop in bond prices won’t do too much harm to the overall economy.

One exception: Banks. Stein says historically banks have tended to put their money in longer-term bonds, which have higher yields, when interest rates are low. And he sees some of that behavior today. The problem is longer-term bonds tend to lose the most when interest rates rise.

Determining how much of a hit banks could take from a drop in bond prices isn’t easy. Banks aren’t required to disclose their bonds holdings. Most give clues, but not in any consistent way. What’s more, higher interest rates would boost banks’ lending profits, offsetting some of the losses in their bond portfolios.

Still, it appears, at least initially, banks stand to lose more from higher rates than they will gain. According to FDIC data, banks earned on average just 3.86% on all their loans and leases. That was the lowest that figure has been since the FDIC began collecting the data back in 1984, but given that 10-year Treasury bonds are yielding around 2%, still high enough to substantiate Stein’s claim that banks are “reaching for yield.”

Last summer, JPMorgan Chase CEO Jamie Dimon, in an effort to reassure Congress about the safety of his bank’s investments in the wake of the London Whale trading loss, testified that the average duration of the the bonds in JPMorgan’s portfolio was three years. Look at JPMorgan’s books, however, and you might come away with a very different number….”

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Treasuries Start The Week Off to the Downside

“Treasury 10-year notes declined for the first time in four days as the U.S. government prepared to auction $72 billion in coupon-bearing securities this week.

Longer maturities led losses as economists said a report in two days will show retail sales rose in January amid an improving labor market. The government is scheduled to sell $32 billion of three-year notes tomorrow, $24 billion in 10-year debt the following day and $16 billion in 30-year bonds on Feb. 14. President Barack Obama intends to use his State of the Union address this week to focus on job creation, marking a renewed emphasis on the economic issues.

“We’re in a tight range and the auctions this week will be the focus for Treasuries,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “The market can cheapen up into those sales and the 10-year should auction above 2 percent.”

The 10-year yield rose three basis points, or 0.03 percentage point, to 1.98 percent as of 7:34 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 declined 7/32, or $2.19 per $1,000 face amount, to 96 7/8. The yield declined seven basis points last week.

Treasuries handed investors a 0.8 percent loss this year through Feb. 8, compared with a 0.5 percent decline for an index of government bonds around the world, according to Bank of America Merrill Lynch data. The benchmark 10-year yield climbed to 2.06 percent on Feb. 4, the highest level since April 12.

‘Cleaning Up’…”

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Appetite for Bunds and Higher Yielding Bonds Fall

“Germany is losing a yearlong borrowing-cost advantage over the U.S. as healing in the 17- nation euro area lures investors to greater returns in Italian and Spanish bonds.

German securities had their worst January since at least 1986 and options traders hold almost three times more bets on further declines than a rally, according to data compiled by Bloomberg. That contrasts with Treasuries, where wagers through derivatives are about even. JPMorgan Chase & Co. says Germany’s 10-year yields will exceed U.S. rates for the first time since February 2012 by the end of the third quarter.

Demand for the euro area’s benchmark assets is waning after European Central Bank President Mario Draghi dispelled concern the bloc may break up and as banks pay back emergency loans two years earlier than required. With confidence recovering from last year’s debt crisis, German two-year note yields climbed to a 10-month high in January from below zero, while relative borrowing costs tumbled in Italy and Spain, the region’s third- and fourth-largest economies.

“Bunds could come under pressure as we expect to see more diversification into higher-yielding peripheral bonds,” said Oliver Eichmann, a money manager at DWS Investment GmbH in Frankfurt, Germany’s biggest mutual fund, which oversees $379 billion. “We prefer Treasuries in the near term.”

Draghi allayed investors’ concern the euro region would collapse after he pledged in July to do “whatever it takes” to hold the currency bloc together. The Stoxx Europe 600 Index of equities has rallied 12 percent since then and a composite gauge of euro-area services and manufacturing output improved to 48.6 in January, the highest level since March.

Crisis Remedies…”

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Spain Borrowing Costs Rise Amid Corruption Allegations

“Spain’s borrowing costs rose even as it beat its maximum target of 4.5 billion euros ($6.11 billion) at a debt sale today as corruption allegations targeting the government threaten to reverse last month’s rally.

The Madrid-based Treasury sold a total of 4.61 billion euros of debt, including a 2.75 percent 2015 note with a yield of 2.823 percent, compared with 2.476 percent the last time it was sold on Jan. 10. A 2018 note yielded 4.123 percent, up from 3.770 percent on Jan. 17, and it sold a 2029 bond at 5.787 percent, compared with 5.555 percent at its last 15-year benchmark bond sale on Jan. 10.

The sovereign’s securities led declines among the euro- region’s so-called peripheral countries this week even as German Chancellor Angela Merkel backed Premier Mariano Rajoy after he denied receiving illegal cash payments. Demand for Spanish assets is weakening as the Treasury seeks to fast-track a higher net issuance program this year.

“The upper end of the target range wasn’t overshot significantly showing that positive momentum for peripherals has abated,” Norbert Aul, a rates strategist at Royal Bank of Canada in London said in a telephone interview. “We had a very good start this year for peripheral funding and we see some setback potential over the coming weeks even if it isn’t a full- blown sell-off.”

Bond Demand

Demand for the 2015 note was 2.21 times the amount sold, compared with 2.07 last month, while the bid-to-cover ratio was 2.24 for the 2018 one, compared with 2.32 in January, and 2.02 for the 2029 bonds from 2.85 last month….”

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France Sells Nearly 8 Billion Euros of Bonds Despite Rising Yields


“France sold 7.98 billion euros ($10.82 billion) in debt as borrowing costs rose.

The treasury auctioned 3.02 billion euros of nine-year securities at an average yield of 2.30 percent, compared with 2.07 percent at the last such sale on Jan. 3. It sold 3.19 billion euros of 14-year bonds were sold at a yield of 2.85 percent, compared with 2.56 percent in the last auction on Dec. 6. It also sold 1.77 billion euros of seven-year debt at an average yield of 1.83 percent.

France’s second bond auction of the year comes as the European Central Bank’s promise to keep the euro intact has reduced investor concern about Italian and Spanish debt, pulling down 10-year yields for those countries. That has shifted focus to the real economy in France, where President Francois Hollande is battling joblessness at a 15-year high. Economists say France may have slipped into recession.”

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BoE Keeps Rates Unchanged, QE Continues as Maturing Gilts to be Reinvested

“The Bank of England will reinvest the first gilts to mature since it started its asset-purchase program four years ago as it sustains stimulus for an economy in a “slow” recovery.

The Monetary Policy Committee led by Governor Mervyn King will buy more bonds with the 6.6 billion pounds ($10.4 billion) associated with a gilt maturing March 7, the BOE said in a statement today. The bank also held its target for quantitative easing at 375 billion pounds and said inflation may remain above its 2 percent target for the next two years.

The decision came as Bank of Canada Governor Mark Carney, who will succeed King in July, told lawmakers that the BOE’s current policy may be enough to help the economy achieve “escape velocity.” The gilt reinvestment shows officials want to avoid tightening policy as the U.K. confronts the risk of an unprecedented triple-dip recession. While inflation is likely to remain above target longer than previously forecast, the MPC said it would “look through” this temporary factor.

“The BOE put a toe gently in the water on guidance today, by describing that it intends to look through the boost to inflation from administered prices,” said Rob Wood, an economist at Berenberg Bank in London and a former Bank of England officials “That policy is sensible. A change in the way university tuition is paid for should not change the monetary policy stance.”

The BOE didn’t say what it will do with future gilt redemptions. It said the 6.6 billion pounds comprises the redemption payment on the gilt, as well as the cash flow resulting from the indemnity provided by the Treasury to cover any difference between the redemption payment and the original amount invested. It bought the securities at an average price of about 107.3 percent of face amount, its data show.

Inflation Target…”

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U.S to Offer Floating Rate Paper

“WASHINGTON—The U.S. plans to issue floating-rate notes within the next year, though first it must resolve how to set the adjustable rates on the securities.

The Treasury Department announced plans last year for debt securities with rates that periodically reset either up or down but previously left the timing of their debut open-ended. The main unresolved question for the Treasury is which index will control the notes’ interest rates, a sensitive issue for bond investors, especially after allegations that bankers rigged the London Interbank Offered Rate, or Libor.

Floating-rate notes would be the first addition to the department’s products in more than 15 years, potentially expanding the Treasury’s investor base and helping extend the maturity of government debt.

Unlike fixed-rate securities, floating-rate debt pays interest, depending on how interest rates have moved. To do that, the floating-rate Treasurys would need to have some sort of benchmark, or index, rate to be measured against.

“The main unresolved item continues to be the choice of a floating-rate index,” according to minutes of a Treasury Borrowing Advisory Committee meeting released Wednesday.

The committee, which is composed of executives from some of Wall Street’s largest banks and bond investors, said more than half of the industry preferred using repo rates—derived from swapping high-quality bonds for cash in bank trades. Known as repurchase, or repo, agreements, they are a crucial source of short-term funding for many banks….”

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