UK gilt yields plunge to 3-week low on 2019 growth worries

LONDON: British government bond yields tumbled to their lowest since Prime Minister Theresa May postponed a key Brexit vote three weeks ago, as investors rushed into safe assets following weak Chinese and European data.

On the first trading day of 2019, the 10-year gilt yield  fell to its lowest since Dec. 12 at 1.176 percent and was on track for its biggest one-day fall since Nov. 15, when several ministers quit in protest at May's Brexit deal.

Later on Wednesday gilt prices pared gains, and the 10-year yield stood 6 basis points down on the day at 1.21 percent at 1529 GMT as European share prices recouped most of the day's losses.

Global economic worries rather than Brexit were the drivers of Wednesday's moves in fixed income markets, as yields on safe-haven German Bunds and U.S. Treasuries also fell on the first trading day of 2019.

"It's weak global sentiment," RBC bond strategist Vatsala Datta said. "That was already the case towards the end of 2018, and the manufacturing PMIs this morning from China and Europe didn't help."

Chinese survey data early on Wednesday showed the first fall in factory output in 19 months and a euro zone manufacturing purchasing managers' index (PMI) grew at the weakest rate since February 2016.

Similar British data beat economists' forecasts, but only because businesses stocked up on raw materials and finished goods in fear of trade disruption after Britain leaves the European Union on March 29.

Gilt yields fell less than German Bunds, but by more than U.S. Treasuries.

Datta said she thought bond yields had fallen further than the economic outlook warranted, possibly due to thin volumes in the market during the Christmas and New Year holiday period.

"We think growth is going to be decent -- weaker but still growing. So we think that will be enough for central banks to keep tightening," she said.

RBC expects the U.S. Federal Reserve to raise interest rates twice in 2019, and the Bank of England to raise rates to 1.0 percent from 0.75 percent in August.

Ten-year gilt yields are likely to finish the year around 2 percent, while 10-year U.S. Treasury yields are seen rising to 3.3 percent, Datta added.