U.K. Debt Yields Sink in Race to Safety

  • Two-year gilt yields decline this month by most in six years
  • BOE Inflation Report may reinforce low-rate wagers: SocGen

A rally in U.K. government debt sent two-year gilt yields tumbling this month by the most since 2010, when the Bank of England was still in the process of boosting its quantitative-easing program.

This time around, it’s investor demand for the safety of fixed-income assets amid whipsawing markets and negative interest rates across the globe that’s driving yields lower.

Two-year gilt yields dropped to the lowest in a year, while those on benchmark 10-year bonds also tumbled, after the Bank of Japan surprised investors by adopting a negative interest-rate strategy. The move follows signals that the European Central Bank may bolster its stimulus program as soon as March and comes days before the Bank of England presents new growth and inflation forecasts on Feb. 4.

“The BOJ is the latest surprise but the ECB were also dovish, and following some of the commentary from the BOE they’re seen as likely to present quite a dovish Quarterly Inflation Report,” said Jason Simpson, a strategist at Societe Generale SA in London. Also, “turmoil in risk assets -- commodities, oil, emerging markets etc. -- is seen pushing money into safe assets.”

U.K. two-year gilt yields fell six basis points, or 0.06 percentage point, to 0.34 percent at 4:35 p.m. London time. They posted a 31 basis-point monthly drop, the most since February 2010. The 1 percent security due in September 2017 climbed 0.095, or 95 pence per 1,000-pound ($1,415) face amount, to 101.05.

The 10-year bond yield tumbled as much as 11 basis points to 1.56 percent, the lowest since April.

Forward contracts based on the sterling overnight index average, or Sonia, show traders aren’t fully pricing in a quarter-point increase to the BOE’s 0.5 percent bank rate until after March 2017.

It’s not just the U.K. that’s experiencing a surge in demand for its debt. Note yields dropped to records across the euro region on Friday, while the yield on U.S. 10-year Treasuries tumbled to the lowest since October.

The pound extended its recent declines. It dropped 1.4 percent to $1.4159, down 4 percent in January for its biggest monthly slide since March. Sterling slipped 0.3 percent to 76.42 pence per euro, leaving it almost 4 percent weaker this month.

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