Gilts rallied sharply just before......>

GILT SUMMARY: Gilts rallied sharply just before midday, led by the ultra

long-end, and have pretty much traded sideways for the remainder of the London

afternoon session. Traders were left scratching heads for the reason why,

however could be of been caused by traders caught short following high demand

seen at 0.125% Aug 2048 IL Gilt syndication with only Stg3bln allocated.

- 2-yr Gilt yield is -0.5bp at 0.441%, 5-yr -1.3bps at 0.695%, 10-yr -2.3bp at

1.234% and 30-yr -2.6bp at 1.84% according to Tradeweb.

- Gilts actually slipped lower in morning session, weighed by bond supply from

Austria, Germany, EFSF and UK. Rally in US Dollar also put pressure US

Treasuries. But faded the move as demand came in strong at the auctions.

- Gilts then spiked to session high as DMO allocated only Stg3bln of new 0.125%

Aug 2048 Il Gilt after receiving Stg25bln of orders. Traders then noted large

gilt basis trade going through with 8,164 G Z7 traded at 125.33, Possibly

selling the 10-yr benchmark versus buying the futures.

- UK IL Gilts have sharply outperformed nominals with breakevens between 3-4bp

wider. While swap spreads are steady with exception of 2-yr which is 2bp wider.