LONDON: Short and medium-dated gilt yields hovered near record lows on Friday, as the market took stock of a tumultuous week in which share prices have fallen to one-year lows and central banks have set the stage for an extended period of low interest rates.
September gilt futures were 36 ticks down on the day at 128.39 at 1237 GMT, moving further away from a contract high of 129.12 set on Thursday, and in line with Bunds, as share prices rallied 2 percent on the day
Ten-year gilts rallied on Thursday to take yields to a record low of 2.460 percent, but then sold off heavily in late trade, including after the future had settled for the day. The gilts recouped some of these losses on Friday, with yields 3 basis points down on the day at 2.52 percent.
Yield spreads versus 10-year Bunds were 5 basis points tighter than at 1530 GMT on Thursday at around 17 basis points. Earlier in the session they touched 16.6 basis points, their lowest since early May.
Overall, 10-year gilt yields are 13 basis points lower than last Friday and a massive 87 basis points below their level at the start of the month.
Sam Hill, a fixed income strategist at Royal Bank of Canada, said he expected gilts to maintain these price gains. Statements by the US Federal Reserve and the Bank of England had confirmed market expectations that a global economic slowdown would force central banks to keep interest rates at rock-bottom levels for longer than previously thought.
"People are expecting another extended period of rates on hold," he said. "I think there's a good chance that gilts will be able to hold on to most of their gains.
There was little gilt market reaction to either second-quarter construction output data which the Office for National Statistics later withdrew due to errors or to a ban on short selling shares in France, Italy, Spain and Belgium.
However solid July US retail sales data kept futures prices on a negative footing
Two year gilt yields hit a record low of 0.520 percent on Wednesday just 2 basis points above the BoE's policy rate before retreating to 0.65 percent by Friday.
Five-year yields are at 1.14 percent, after also hitting a record low on Wednesday at 1.030 percent.
These low yield levels leave little scope for further price gains for two- and five-year debt, Hill said, adding that 10-year gilts are likely to outperform them in any further rallies contrary to the pattern in more normal market circumstances.
Ten-year gilts are also likely to outperform 30-years in any future rallies, he added, as the low-growth circumstances in which gilts might gain would be likely to require Britain to issue more debt than planned. Hefty falls in share prices relative to gilts have also reduced the appeal for investment funds to shift out of equities and into fixed income.
Thirty-year gilt yields were flat on the day on Friday at 3.95 percent, missing out on the price gains for shorter maturities. Yields touched a one-year low of 3.839 percent on Wednesday.
Copyright Reuters, 2011
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