Gilt yields near one-month low as Britain starts clock on Brexit

LONDON: British government bonds rallied to their highest in almost a month on Wednesday as Prime Minister Theresa May formally started two years of talks to leave the European Union, Demand was boosted by end-of-quarter buying across major markets as well as by market uncertainty about Brexit.

Benchmark 10-year gilt yields sank 4 basis points on the day to 1.149 percent, their lowest since March 6, while 20-year gilt yields touched their lowest since Feb. 28 at 1.664 percent as prices rose.

"There are lots of flows attributable to the quarter end, and a lot of people are very unwilling to sit on cash," ADM Investor Services strategist Marc Ostwald said.

Both gilts and euro zone debt got a boost after sources told Reuters that European Central Bank policymakers are wary of changing their policy message next month and want to reassure investors that their easy money policy is far from ending.

US Treasuries were also up on the day, and Ostwald said gilts looked on track to be the best-performing major advanced economy bonds this quarter, as investors had homed in on the risks to growth posed by Brexit.

Data from the Bank of England earlier on Wednesday showed the weakest three-monthly growth in consumer borrowing in nearly two years, raising doubts about the health of the consumer economy as inflation picked up.

The coming quarter would offer investors a better guide as to how much inflation was likely to overshoot the BoE's target as a result of sterling's tumble after last June's Brexit vote, Ostwald said.

Some analysts fear markets have underestimated how much inflation will rise in Britain -- potentially laying the groundwork for a sell-off in long-dated gilts.

Ostwald said it would take time before the impact of the Brexit talks became clear for the gilt market.

"It probably will be a little impervious for the time being, as it is not until we get an idea of some of the costs that may arise, and how sterling will react, that we get any concrete implications," he said.

For now, Ostwald expected the uncertain economic outlook to dissuade most BoE policymakers from talking of higher interest rates, even as inflation picks up.

Late on Tuesday BoE policymaker Ian McCafferty - who opposed restarting bond purchases last year - shied away from suggesting that it would soon be time to raise rates during a radio phone-in show.