LONDON: Long-dated gilt prices hit record highs on Tuesday as evidence of weakening economic growth prompted investors to bet on a slower pace of interest rate increases in Britain in coming years.
Government bonds in major economies around the world rallied after purchasing manager surveys showed faltering growth in the euro zone and the weakest increase in activity among British services firms since May 2013.
Short sterling futures soared, particularly for the 2017 and 2018 contracts which saw gains of more than 12 ticks on the day, indicating expectations of a much more gradual path for rate hikes.
The most heavily traded contract, for December 2015, was up 3 ticks on the day at 1609 GMT.
Marc Ostwald, a strategist at ADM Investor Services International, said the market was pushing expectations for the first BoE rate hike into next year following Tuesday's services PMI and a BoE survey of lenders.
British banks expect to rein in growth in the supply of lending to households and keep business lending flat in the next three months, the BoE survey showed.
"This just doesn't bode particularly well. It pushes the profile of when people think rates are going to rise. And we've got all the political uncertainty as well, so people just keep pushing back," he said.
Britain holds a national election in May with the main Conservative and Labour parties running neck-and-neck in opinion polls.
Twenty and 30-year gilt yields hit new record lows of 2.148 percent and 2.328 percent respectively, and were last down around 7 basis points on the day.
The 10-year gilt yield bottomed at its lowest level since Aug. 31 2012 at 1.572 percent. At 1554 GMT it had recovered to 1.60 percent, down 7 basis points on the day.
The yield spread between 10-year gilts and the equivalent German Bund narrowed around 2 basis points on the day to 113 basis points, having earlier troughed at 112.2 basis points, its lowest level since Dec. 16.
Britain sold 2.75 billion pounds of its 2.75 percent 2024 gilt on Tuesday, attracting demand of 1.58 times the amount on offer - an improvement over 1.45 times at the bond's last auction on Nov. 13.
"One can only assume that the street made too much room for it. The auction was very, very clean," said Ostwald.
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