LONDON: Thirty-year gilt yields tumbled to a record low and gilt futures surged on Monday, after triple-A European government bond prices were lifted by plummeting share prices and bad news for banks and euro zone peripheral debt.
The December gilt future gained 140 ticks on the day to settle at 129.41, and in post-settlement trade it hit a contract high of 129.62.
Ten-year gilt yields slid 14 basis points on the day to 2.30 percent, leading the way in a futures-driven rally, having touched a low of 2.284 percent, less than 5 basis points above the all-time low of 2.238 percent struck in mid-August.
Twenty- and 30-year gilt yields dropped only 10-11 basis points on the day, but did both touch record lows at 3.361 percent and 3.632 percent respectively .
Share prices in London finished at their lowest in two weeks, some 3.5 percent down on the day, after banks were hit by the unknown scale of potential damages they may have to pay due to US court action following the 2007-08 subprime crisis.
"It's blind panic," said Marc Ostwald, gilts strategist at Monument Securities. "People are jumping around trying to work out if the Western world is going into recession."
Gilts underperformed Bunds, with the future trailing the equivalent Bund contract by about 30 ticks and 10-year yield spreads widening by 2 basis points to more than 43 basis points.
"Bunds have outperformed as you have the periphery collapsing, as people look at the euro zone which doesn't seem to have a hand on the tiller," Ostwald said.
Investors were rattled by the defeat of German Chancellor Angela Merkel's Christian Democrat party in a regional election, which cast further doubt on the euro zone's ability to solve its debt crisis. Speedy approval of the European Financial Stability Fund bailout mechanism -- which requires unanimous euro zone support -- seems in doubt after some Slovak lawmakers opposed voting on it until December.
Greece appears in dispute with the European Union and International Monetary Fund over urgent structural reforms, while there are also doubts about Italy's capacity to cut public spending.
Ostwald said that cash volumes in the gilt market were thin, with US markets shut for the Labor Day holiday and a raft of important central bank meetings due this week.
The global economic slowdown and a share price slump are likely to dominate debate at the Bank of England's September monetary policy meeting on Thursday, though most economists do not expect any further stimulus from the central bank for now.
Gilts were also supported by a weaker-than-expected survey of UK services activity which reinforced concerns about Britain's fragile economic recovery and raised the chance that the BoE could inject more stimulus to spur growth later this yer.
Little UK-specific news is scheduled for Tuesday, with British Retail Consortium sales figures and the Society of Motor Manufacturers and Traders' car registration numbers the only major data due.
RBC strategist Sam Hill said the market should also get some support from gilt investors looking to reinvest some 6 billion pounds of coupon payments due this week, especially as the only supply this week is Tuesday's sale via tender of 1 billion pounds of benchmark 20-year gilts.
"Supply's quite light and cash flow is positive, so technically that should underpin the market on a relative basis," he said.
Copyright Reuters, 2011
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