LONDON: British government bond yields hit new record lows on Friday, dragged lower by a slump in euro zone yields after Thursday's announcement by the European Central Bank of a bond buying plan.
Thirty-year gilt yields led the move downwards and hit a record low 2.126 percent, 8 basis points lower on the day, as long-dated Bund yields also fell sharply. "It's a massive contagion effect," said Marc Ostwald, fixed income strategist at ADM Investor Services International.
"No person in their right mind would buy G7 bonds at these levels. Everything is done on the basis of relative value, so if there is a big flattening in the euro zone it has an impact for gilts." To boost the ailing euro zone economy and prevent deflation from setting in, the ECB said it will buy 60 billion euros of assets a month from March, focusing mainly on sovereign bonds.
The 18-month quantitative easing programme is already surpassing initial expectations for 500-700 billion euros of stimulus and could even be extended.
Bond purchases will cover maturities of up to 30 years -- longer than many in the market had expected. The gilt market shrugged off robust British retail sales data -- which caused only a brief dip in gilt futures prices -- and the prices of medium- and long-dated gilts rose strongly.
Twenty-year gilt yields pushed below 2 percent to hit a record low of 1.951 percent, and 10-year yields fell as low as 1.443 percent, within a few basis points of an all-time trough set in July 2012.
Gilt prices lagged the rally in Bunds, however, and for 10-year yields the spread widened sharply for the second day in a row, with 10-year gilts offering as much as 112.7 basis points over Bunds, the most in a week.
Next week the UK Debt Management Office is due to sell several billion pounds of 40-year index-linked gilts via syndication, which offer a real yield of -0.95 percent, close to a record low.
"The outright valuation is hardly appealing," said RBC fixed income strategist Vatsala Datta. "However, we do not see these factors as being a deterrent to a strong take-up," she added, noting the bond attracted record demand at its launch in July.
Datta said she expected the 2058 index-linked gilt to be priced to yield 2-3 basis points more than 2062 linker, roughly in line with its current spread.
Gilt syndications typically occur on Tuesdays, though next week that will be the same day that a first estimate of Britain's fourth-quarter gross domestic product is due, so Ostwald said it could be deferred until Wednesday.
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