LONDON: Ten-year UK government bond yields fell to within a whisker of a record low and gilt futures rose to a contract high on Tuesday as investors sought safety after elections in Greece and France threatened to derail the euro zone's austerity drive.
Analysts said gilts were likely to remain supported by risk-averse investors for the time being, even though the Bank of England has reached the end of its asset-buying programme and is unlikely to announce an expansion at its meeting this week.
In Greece, the two parties supporting a European Union/International Monetary Fund bailout failed to secure a parliamentary majority, throwing into question the future of the programme and potentially Greece's membership of the euro.
"The most likely scenario looks to us (that) there's going to be a re-election and if the left parties come into power then there is risk of whether we're going to more austerity or not," said Vatsala Datta, strategist at Lloyds Bank WBM.
The Greek result, coupled with the election win in France of Socialist Francois Hollande, who has championed a longer time-frame for eliminating the deficit, has fuelled concerns of a wider push-back against German-led austerity in the euro zone.
"There's a risk now of how he coordinates with (German Chancellor Angela) Merkel and whether he pushes on changing the fiscal compact," Datta said, adding that such political risks were keeping core government bond markets supported.
June gilt futures settled 85 ticks up at 117.75, shortly after striking a contract high of 117.81.
In the cash market, the yield on 10-year bonds was 6 basis points lower at 1.929 percent.
The yield had earlier fallen to a day's low of 1.924 percent, near a record low of 1.918 struck in mid-January, according to Reuters data.
Investors are looking ahead to Thursday's Bank of England policy decision on whether to extend their 325 billion pound quantitative easing (QE) programme which ended last week.
"With the situation worsening in Europe (and) with all the political risks around, it's becoming a much tighter call," Datta said.
"But given how strong their rhetoric on inflation has been recently, it will be difficult for them to justify if they do more QE so I think the chances are that they won't."
Tuesday's price gains, knocking the yield lower, were concentrated in 6- to 15-year gilts. Longer-dated bonds did not fare quite as well because investors were positioning for an auction of 2 billion pounds of gilts due in 2042 on Wednesday.
"It's quite cheap (at) the back end so I think the supply should be taken well," Datta said.
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