LONDON: British five-year gilt yields fell to their lowest level since mid-2013 on Wednesday, after weak U.S. economic data underlined why Bank of England officials are likely to strike a cautious tone in their latest economic outlook.
Government bonds around the world rallied after figures showed activity in the vast U.S. services sector slowed to its lowest in nearly two years last month, suggesting economic growth weakened in the world's largest economy.
The five-year gilt yield slipped to 0.834 percent, its lowest level since May 2013, before recovering to 0.876 percent by the close of trading, down 2 basis points on the day.
Signs of slowing U.S. growth will do little to quell unease about the world economy among BoE policymakers, who set out their quarterly outlook at 1200 GMT on Thursday.
Financial markets are fully pricing in a first BoE rate hike only for mid-2018, and assign a roughly 30 percent chance of an interest rate cut by January next year, according to RBS rates strategist Simon Peck.
He expects Monetary Policy Committee member Ian McCafferty will cease his lone campaign for an interest rate hike on Thursday, and expects little change in the cautious tone from Bank of England Governor Mark Carney.
"From our perspective, there's not that much in terms of new policy insight that we're expecting, given that we've had a dovish speech from Mark Carney only a fortnight ago," Peck said.
While the BoE's inflation projections might indicate markets have pushed back their bets for an interest rate hike too far into the future, Peck added that it was hard to predict whether the market would react much to that.
The 10-year gilt yield touched its lowest level since March 26 at 1.488 percent after the U.S. services data, before bouncing back to 1.531 percent by the end of the day - down a basis point on the day.
The premium the 10-year gilt yields over the equivalent German Bund widened by around 1.5 basis points on the day to 125 basis points.
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