UK gilt yields fall after ECB provides bond-buying plans

LONDON, March 5 (Reuters) - British government bond yields fell on Thursday after the European Central Bank laid out its plans for bond purchases, retreating from an 11-week high set when ECB President Mario Draghi first started speaking.

Ten-year gilt yields finished the day 3 basis points lower at 1.85 percent. They had risen as high as 1.909 percent shortly after Draghi said the ECB was raising its growth forecasts for the euro zone, Britain's biggest trading partner.

Gilts broadly tracked the move in German government bonds. Bunds reversed earlier losses after Draghi said the ECB would buy bonds with negative yields as part of its 60 billion-euro ($66 billion) a month bond purchase programme, which starts on Monday.

Draghi also said the ECB would buy bonds beyond a provisional end date of September 2016 if necessary, although some economists said that looked unlikely unless the euro zone economy undershot the ECB's new forecasts.

RBS (LSE: RBS.L - news) gilts strategist Simon Peck said the rally in Bunds was positive for British government debt, too.

"We've tended to be following Bunds around, and they have been rallying on the discussion that the ECB are comfortable buying at negative yields," he said. "There was some ambiguity over it, and they've confirmed they will."

British short-dated government bonds outperformed longer maturities, in contrast to Bunds, where yields on two-year debt were already at the floor of -0.2 percent which Draghi set for ECB purchases.

Two-year gilt yields were 3.5 basis points down on the day at 0.568 percent, compared with a 1-basis-point drop for 30-year yields to 2.61 percent.

Peck said short-dated gilts had more scope to outperform, as he feared Britain's economy would weaken amid political uncertainty before a May 7's national election.

"If business confidence is a bit shaky, it doesn't bode so well for near-term economic dynamics, and interest rates could stay lower for longer," he said.

Ten-year gilts slightly underperformed Bunds, with their yield spread widening a fraction to around 151 basis points.

March long gilt future 117.68 (+0.20)

June 2015 short sterling 99.39 (unch)

Dec 2015 short sterling 99.18 (+0.01)

10-year yield 1.85 pct (-3 bps)

-------------------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 = 0.9082 euros) (Reporting by David Milliken; Editing by Larry King)