LONDON: Five-year British government bond prices surged to a five-month high on Tuesday, helped by investors piling into safe assets as commodity prices and stock markets slid.
Gilt yields fell alongside those of other major government bonds, with the 10-year British government bond yield falling most heavily across the range of maturities. It closed at 1.78 percent, down around 10 basis points on the day, after earlier touching its lowest level since Aug. 24 at 1.774 percent.
The five-year gilt yield bottomed out at 1.199 percent, its lowest since April 22, and closed around 9 basis points down on the day at 1.21 percent.
"There was a lot of equity market-watching today," said Jason Simpson, fixed income strategist at Societe Generale, pointing to a near 3 percent slump in Britain's FTSE 100 share index.
Ten-year gilts underperformed against the equivalent German debt for much of the session, with the yield spread between the two at one point hitting 123.6 basis points, its highest level since Aug. 28.
Later in the session the spread narrowed sharply to 119 basis points, amid volatile global financial market trading which saw shares across finish the day sharply lower. Short-sterling futures also climbed heavily, particularly for late-2016 contracts and further out, implying a shallower path of market expectations for Bank of England interest rate hikes in future.
Strong demand at a syndicated sale of inflation-linked bonds encouraged Britain's Debt Management Office to bump up its target for linker sales this financial year by 500 million pounds ($768 million).
The DMO sold 2.5 billion pounds of the 2068 index-linked bond -- more than planned -- and said it would raise the total volume of index-linked gilts it intends to sell in the 2015/16 financial year to 15.7 billion pounds from 15.2 billion pounds.
Orders for the gilt, the longest-dated inflation-linked gilt in circulation, totalled 7.8 billion pounds, and demand came almost exclusively from British-based investors, as usual at such sales.
"The syndication went pretty well, they upsized the book as I think they only needed to sell 2.1 billion pounds," said SocGen's Simpson.
Pension funds are typically buyers for linkers as a means of hedging long-term risk, even though returns from such bonds are at historically low levels.
The gilt sold at a real yield of -0.8655 percent, 1.75 basis points below that of the 2062 index-linked gilt, after buyers were willing to pay prices at the top end of initial guidance.
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