LONDON: British benchmark government debt yields briefly fell below Germany's for the first time in more than two years on Thursday, driven by worries that the euro zone crisis is threatening the region's biggest economy.
It was the first time gilts were seen as a safer bet than German government 10-year debt since March 2009, when the Bank of England launched a then unprecedented quantitative easing programme to buy bonds and boost a recession-hit economy.
Bunds came under selling pressure for a second day after the weakest auction of German government bonds in a decade continued to rattle investors. The negative mood also weighed on gilts, though the losses were less severe.
December gilt futures settled 18 ticks down at 130.93, outperforming equivalent Bunds by around 60 ticks.
In the cash market, the yield on 10-year gilts was up 2 basis points at 2.17 percent. The yield spread over Bunds was just 3 basis points. It had been 5 basis points below the equivalent Bund in early trade.
"It's a continuation of yesterday, after a poor (Bund) auction. There is a lot of concern among international investors, not about German credit per se, but about the euro area project," said Mohit Kumar, strategist at Deutsche Bank.
"The beneficiaries are gilts and Treasuries."
SUPPORT FOR GILTS
Analysts said Britain was benefitting from being able to issue triple-A rated debt in its own currency, with additional support coming from the Bank of England's second round of asset purchases, which it is likely to expand in the coming months.
"Gilts are in the fortunate position that we have a central bank that is doing quantitative easing and is showing every sign that it will do more if the economic fundamentals carry on as they are," said Eric Wand, strategist at Lloyds.
"And with Britain being out of the euro and being a triple-A (country), it's an obvious trade."
Britain's Conservative-led coalition government has embarked on a harsh austerity drive to erase a huge budget deficit, and says its commitment to cutting debt is one of the main reasons why gilt yields have fallen to record lows.
Strategists said gilts might lose some of their shine next week when the British government's independent fiscal watchdog is expected to cut its growth estimates and revise up borrowing forecasts for the next few years.
Moreover, if investor worries over Bunds continue, the concerns will spill over to gilts at some point, said Deutsche Bank's Kumar.
However, support from the Bank of England's 75 billion pound programme of bond-buying could help push the gilt/Bund yield spread back into negative territory in the coming weeks, said Shahid Ladha of BNP Paribas.
There was little reaction to data that confirmed Britain's economy grew by 0.5 percent between July and September . The figure was flattered by a rebound from a second quarter undermined by extra public holidays and supply chain disruption caused by Japan's earthquake.
Markets also shrugged off CBI figures showing UK factory orders fell at their fastest pace in over a year in November due to a slump in euro zone export demand.
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