British gilts and interest rate futures rose on Monday after Lehman Brothers’ filing for bankruptcy protection sparked a flight to safe-haven assets as stocks tumbled. The travails of U.S fourth largest investment bank came with news that Bank of America was buying Merrill Lynch, and the Federal Reserve was accepting stocks in exchange for cash loans for the first time.

At 1135 GMT, short sterling interest rate futures were up as much as 25 ticks in back-month contracts. Lehman’s fall sent European shares tumbling at market open, and by midday, banking stocks were bearing the brunt of the carnage. The FTSEurofirst 300 index fell to its lowest level in nearly two months, down 4 percent at 1,115.92. It is down 26 percent this year, and was on track for its biggest one-day fall since mid-March. British main index FTSE 100 was down 4.59 percent with British bank HBOS leading the downward slide, having lost over a third of its value, down more than 25 percent, as concerns persist that other banks face more writedowns and higher funding crisis. The Bank of England has held rates at 5 percent since April. Money markets are now fully pricing in a quarter-point rate cut by November and four rate cuts by August 2009. “We’re seeing a massive flight to quality with risky assets blown out across the board,” said Jason Simpson, gilts strategist. “It’s hard to know to what degree these are real prices and to what extent the market is just being marked up.” The December gilt future was 172 ticks higher at 112.60, near the contract high of 113.05 scaled last week. The cash 10-year yield tumbled nearly 20 basis points to 4.39 percent. The Bank of England said it was monitoring conditions in sterling money markets closely and would act to stabilise them if necessary. The Bank received bids worth nearly five times the 5 billion pounds on offer for its exceptional fine-tuning operation on Monday, adding that there were 24.1 billion pounds worth of bids, enabling it to satisfy 20.75 percent of the bid.
source: fxstreet.com