UK 5-year gilt yields close at lowest since January

LONDON: British five-year government bond yields closed at their lowest since January on Tuesday, bolstered by fears that lawmakers will vote down government Brexit plans and an inversion at the short end of the U.S. yield curve.

Five-year gilt yields dropped just over a basis point on the day to 0.875 percent at 1700 GMT, their lowest close since Jan. 19.

Ten-year yields dropped to their lowest since Aug. 23 at 1.28 percent, down 3 basis points on the day, while two-year yields edged slightly higher to 0.73 percent.

This mirrored a flatter yield curve in the United States, where five-year Treasury yields fell below those of two-years for the first time since January 2008, something some analysts view as a harbinger of recession.

British investors are focused on the start of a week-long parliament debate on Brexit later on Tuesday which looks likely to lead to a government defeat next week, potentially paving the way to the country leaving the European Union without a transition deal in March.

In a worst-case scenario, that could lead to a sharp rise in inflation and interest rates, and a steeper recession than in 2008, Bank of England Governor Mark Carney warned again on Tuesday in an appearance before lawmakers.

Investment bank Nomura said a poll of about 80 of its clients showed that they saw only a 25 percent chance on average that the vote would pass next Tuesday.

A government defeat would reduce 10-year gilt yields by 4 basis points, while a victory would lift them by 8 basis points, Nomura's clients said.

"Respondents see a second vote of some variety if the vote fails the first time around. Interestingly, 'no deal' is seen as slightly more likely than a second referendum," Nomura market strategists Jordan Rochester and Andy Chaytor said.

Legal developments opened the door a bit more to Britain reversing its decision to leave the EU.

One of the bloc's top legal advisers recommended that its judges should rule that Britain can unilaterally reverse its decision to leave the EU, without permission from other EU members.

"It makes the cliff-edge leverage the EU has had become less potent and we at least have more confidence there'll be no need to stockpile food and medicine as the UK can avoid such a scenario if it wanted to," Rochester and Chaytor said.

Investor demand at an auction of 2.5 billion pounds ($3.18 billion) of 2024 gilts was slightly below average at 1.86 times the sum on offer. But unlike last month the UK Debt Management Office did not need to accept unusually low bids to sell the full volume.