British bond yield edges up after downgrade

The price of British 10-year debt bonds, known as Gilts, fell slightly in morning trading on Monday and the interest rate firmed slightly to 2.144 percent from 2.109 percent on Friday, before Moody's rating agency downgraded Britain's triple "A" status.

At Natixis bank, bond strategist Nordine Naam said: "The correction on British Gilts is limited because the markets had substantially anticipated the decision by the rating agency."

He said: "The moderate reaction by investors regarding British debt can also be explained by the very active stance of the Bank of England, the main buyer of Gilts and which is going to continue and even probably increase its programme of purchases which will have the effect of putting a ceiling on the rates.

Moody's said late on Friday that it had decided to downgrade the notation of British debt by one notch to "Aa1", owing to continuing weakness of the medium-term outlook for the British economy.

It said it now expected that the sluggish performance of the economy would continue in the second half of the decade.

Governments issue debt with a fixed life of for example 10 years, with a guaranteed fixed return in cash terms per year.

At issue, the cash return relative to the value of the debt instrument generates an interest rate or yield.

This indicates the interest rate which the government concerned must offer at that moment to attract funds from savers.

As perceptions of risk attached to the instrument change, for example rise, the bond becomes less attractive, the value on the secondary market of traded debt falls, and the cash return automatically rises as a percentage of the new price.

This indicates the new rate which that government must offer to attract funds.