UK government bond yields plunge to new lows after BoE cuts rates

LONDON: British government bond yields plunged to all-time lows on Thursday after the Bank of England cut interest rates to the lowest level on record and expanded its government bond purchase programme.

The BoE cut rates by 25 basis points to 0.25 percent and said it would buy 60 billion pounds ($79 billion) of government bonds with newly created money as part of a broader stimulus package.

Gilt yields fell to record lows across the curve, while short sterling interest rate futures shot up in anticipation of a further rate cut. John Wraith, strategist at UBS, said markets had been paring back expectations of an aggressive stimulus package from the BoE in the days leading up its decision.

"We've seen a huge rally in response," said. "(That's) partly because of the mechanical impact of more large-scale purchases, partly because of the downbeat tone of its forecast revision, and partly because there's every chance they'll have to more than they have done now."

The Bank said most policymakers expected to cut the rate even closer to zero later this year, prompting short sterling futures to soar between 8 and 11 ticks across 2017 and 2018 contracts.

Sterling fell 1.2 percent against the dollar following the announcement, while Britain's main share index rose by nearly 2 percent.

Five- and 10-year gilt yields hit record lows of 0.196 percent and 0.639 percent respectively, and both closed around 15 basis points lower on the day. Twenty- and 30-year yields hit new lows of 1.309 and 1.476 percent respectively.

Wraith said yields could slip further. "I wouldn't rule anything out at this point. We still haven't seen any hard data, so if the data comes in weaker than people are fearing, then who knows what we might see."

In the minutes following the BoE decision, 10-year gilts yielded some 86.2 basis points less than the equivalent US Treasury - the biggest gap since 2000.

Gilts strongly outperformed German Bunds, with the yield spread between 10-year British and negative-yielding German bonds narrowing to 73.4 basis points, the smallest gap since mid-2013.