UK two-year bonds finish 2020 at record high on COVID fears

LONDON: British two-year government bonds finished 2020 at an all-time high, as ongoing concern about rising coronavirus cases pushed yields deeper into negative territory and investors sought safe assets on the final trading day of the year.

Two-year gilt yields struck a record low of -0.173% shortly after 0800 GMT, and are down 0.7 percentage points since the start of the year and on track for their biggest annual price gain since 2011.

Five-year gilt yields also finished the year below zero at -0.08%, near a record low set in July.

However benchmark 10-year yields at 0.2% remained well clear of the record-low of 0.074% which they struck during financial turmoil at the start of the coronavirus pandemic in March.

The impact of coronavirus on the economy, government spending and Bank of England asset purchases has dominated the gilt market in 2020 and looks set to continue to do so in 2021.

Britain's Debt Management Office has sold a record 414 billion pounds ($566 billion) of gilts since the start of the financial year in April, and is targeting 485.5 billion pounds of gilt sales by the end of the financial year.

For the 2021/2022 financial year, it expects to need to raise around 256 billion pounds from the gilt market.

The BoE plans to buy 150 billion pounds of gilts in 2021 as part of its asset purchase programme, on top of nearly 300 billion pounds of gilt purchases undertaken since March, which will take its total gilt holdings to 875 billion pounds.

Cutting rates below zero also remains an option if the outlook darkens - though markets have largely discounted this in the short term after Britain succeeded in reaching a post-Brexit trade deal with the European Union.

Interest rate futures currently price in a roughly 5% chance that the BoE will cut rates below zero on Feb. 4 after its next meeting.