UK gilts enjoy biggest gains in 4 weeks on weak data

By David Milliken

LONDON, June 25 (Reuters) - Ten-year gilt prices surged on Wednesday, enjoying their strongest gains in more than four weeks as weak British and U.S. data as well as Tuesday's Bank of England comments caused markets to rethink rate-hike timing.

Bank of England Governor Mark Carney was accused of being like an "unreliable boyfriend" by one lawmaker, blowing hot and cold over when the central bank would raise rates.

Carney said he wanted markets to take a closer look at economic data and to be aware of the uncertainty about when interest rates would rise.

The impact on government bond markets was muted on Tuesday, but on Wednesday 10-year gilt yields fell almost 9 basis points to a two-week low of 2.65 percent, representing their biggest one-day price increase since May 28.

German debt rose strongly too, but gilts outperformed, taking the yield spread between 10-year gilts and Bunds down 3 basis points on the day to 138 basis points, their lowest since June 19.

RBC (MCX: RBCM.ME - news) senior economist Sam Hill said the move reflected a mix of weaker British and U.S. data as well as Carney's comments.

"It's a whole host of reasons," he said. "I think certainly earlier on, the aftermath of Carney's performance yesterday wouldn't have hurt the market."

But other major factors included an unexpected slowdown in British retail sales growth in June and a sharp downward revision to first-quarter U.S. gross domestic product, he said.

Short sterling interest rate futures for June 2015 rose a relatively large 6 ticks on the day, as investors priced in a more gradual pace of BoE rate increases, but overall the strip still priced in a rate rise before the end of the year.

There was no market impact from Britain's launch of its first Islamic bond, or sukuk, which drew very strong demand but had a small volume of 200 million pounds ($339.4 million) and may prove to be a one-off.

UK Debt Management Office Robert Stheeman, speaking at a conference on Wednesday, said that the market had adjusted smoothly to the big improvement in Britain's economic outlook over the past year.

But Hill said more volatility was likely as Britain's first interest rate rise since 2007 drew nearer.

"The whole episode of (Carney's) Mansion House speech and his Treasury Select Committee performance underlines that it wouldn't be surprising for markets to become more volatile," he said.

Thursday will be the next test of that, as at 0930 GMT Carney is due to present recommendations from the BoE's Financial Policy Committee on how to reduce the risk of surging house prices without resorting to raising interest rates.

* Sept long gilt future 110.12 (+0.85)

* Sept 2014 short sterling 99.345 (+0.015)

* March 2015 short sterling 99.92 (+0.04)

* 10-year yield 2.65 percent (-9 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 A list of all the strippable British gilts

($1 = 0.5892 British Pounds) (Editing by Andrew Roche)