UK gilts slide, 5-year yields highest since Brexit vote

LONDON, Oct (Shenzhen: 000069.SZ - news) 26 (Reuters) - British government bond prices

fell heavily on Wednesday, pushed lower by a fall in euro zone

debt and domestic factors, lifting yields on two- and five-year

debt to their highest since June's vote to leave the European

Union.

Five-year gilt prices suffered their biggest fall

in over two weeks as yields rose more than 6 basis points on the

day to peak at 0.562 percent, a level last seen as the

referendum result came in on June 24.

Two-year yields also struck a three-month high of

0.305 percent, just over a week before a Bank of England meeting

when it is expected to keep rates steady, contrary to earlier

market expectations of a cut to a record-low 0.1 percent.

BoE Governor Mark Carney said on Tuesday that the central

bank could not ignore the fall in sterling when it considered

the outlook for inflation and rates, reinforcing market

expectations for the central bank to stay on hold.

Only an unexpectedly weak showing from preliminary

third-quarter GDP data due on Thursday was likely to revive bets

for a November rate cut, said RBS (LSE: RBS.L - news) gilts strategist Simon Peck.

"If it is a little stronger than the BoE (Shenzhen: 200725.SZ - news) is forecasting,

that probably puts the nail in the coffin for a November cut, he

said. Most economists expect it to show quarterly growth slowed

to around 0.3 percent from 0.7 percent in the three months after

the Brexit vote.

Also weighing on the gilt market was an announcement by

Lloyds Banking Group (Other OTC: LLOBF - news) that it no longer intended to hold

its 20 billion pounds ($24.5 billion) of gilts until they

matured, due to the "current low interest rate environment".

Lloyds' announcement that it would no longer hold gilts to

maturity had the accounting effect of lifting its capital ratio,

ensuring it could pay a dividend.

"There have been some very small disposals of them," Lloyds

chief financial officer George Culmer told analysts. "We will

see where rates go and we will depend upon that," he added.

RBS's Peck said he did not think Lloyds' statement heralded

a big sell-off, though it was a concern to the market.

"My conclusion is that it is a technical treatment... rather

than a revelation of a change in their appetite," Peck said.

Ten-year gilt yields rose 8 basis points on the

day to 1.171 percent, the highest since Oct. 17, but the price

fall was in line with German debt, and the 10-year

yield spread was unchanged on the day at 106 basis points.

Fifty-year gilt yields were 6 basis points up on

the day as the market continued to digest Tuesday's issuance of

4 billion pounds of July 2065 debt.

Dec (Shanghai: 600875.SS - news) long gilt future 126.04 (-0.89)

Dec 2016 short sterling 99.59 (-0.01)

June 2017 short sterling 99.56 (-0.03)

10-year gilt yield 1.16 pct (+7 bp)

-------------------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

($1 = 0.8177 pounds)

(Editing by Toby Chopra)