LONDON: British gilt yields plunged on Thursday, posting their biggest fall since just after 2016's Brexit vote as Prime Minister Theresa May's premiership hung in the balance.
The turmoil forced Britain's debt agency to accept low-ball bids at an auction for a 20-year bond, to an extent not seen since March 2009, as a wave of ministerial resignations rocked markets.
The 10-year gilt yield fell 15 basis points to 1.36 percent, on track for its largest one-day drop since August 2016 when the Bank of England unleashed a round of stimulus to bolster the UK economy after the country voted to leave the European Union.
As a result of the fall in gilt yields, the ten-year US Treasury interest rate premium over the equivalent gilt rose to its highest since mid-1984 at 174 basis points.
Sterling tumbled 1.7 percent against the US dollar, set for its biggest drop in a year, and the FTSE 100 share index
-- which usually rises when the pound drops -- also fell.
"There's lots more volatility to come, I suspect," Marc Ostwald, market strategist at ADM Investor Services, said.
Prime Minister May battled on Thursday to save a draft divorce deal with the European Union after her Brexit secretary and other ministers quit in protest and eurosceptic lawmakers stepped up efforts to topple her.
The 2 billion pound ($2.55 billion) auction of the 1.75 percent 2037 gilt highlighted investors' nerves.
While offers received outstripped the amount on sale by 1.75 times, the makeup of the bids showed the Debt Management Office had to accept some unusually low ones to sell the full amount of the bond.
The gap between the average accepted yield and the highest stood at 5.1 basis points - the widest since March 2009, at the depths of the financial crisis.
In contrast, the average yield tail for conventional bond auctions over the last 10 years stands at just under 0.6 basis points.
"It's not really an environment where (primary dealers) are going to want to take on board a warehouse-load of risk," Societe Generale strategist Jason Simpson said.
BOE HIKE BETS EVAPORATE
Investors now think the Bank of England is unlikely to raise interest rates again until 2020, compared with late 2019 earlier this week, according to the sterling overnight index average curve.
"There's an element of a move to safe havens, and without a shadow of a doubt the market's been moving to price out a rate hike next year," Ostwald said.
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