UK yield curve nears flattest since 2008 on global bond rally

LONDON: British government bond prices soared for a third day on Friday as global investors scaled back growth and interest rate bets, pushing 30-year gilt yields to their lowest since October 2016 and the yield curve to near its flattest in a decade.

Thirty-year gilt yields have fallen more than 20 basis points over the past week and dropped 7 basis points on Friday to 1.477 percent, their lowest since Oct. 4, 2016.

Ten-year yields have seen their deepest fall this week since just after Britain voted to leave the European Union in June 2016, and the spread between two-year and 10-year gilts narrowed to 35.0 basis points, within a whisker of a low of 34.7 basis points recorded in August 2016.

The last time the two-year/10-year gilt curve was flatter was in October 2008, and earlier on Friday the US version of the curve turned negative - something some economists view as a warning of recession.

Global economic developments were impacting the gilt market more than the European Union's decision to allow Britain to postpone Brexit until April 12 at the earliest, said Marc Ostwald, a market strategist at ADM Investor Services.

"Following on from everyone saying 'Oh my goodness, have you seen what the Fed's done?', there's been a general array of economic uncertainty, not only Brexit-related. You can see how that drives the move," he said.

On Wednesday the US Federal Reserve brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year and phasing out bond sales amid signs of an economic slowdown.

US, German and French purchasing managers' indices all fell short of expectations on Friday, and markets have now priced out any chance of a BoE rate rise this year, compared with a 40 percent chance in the middle of the week.

The BoE said on Thursday it still expected to need to raise rates gradually, if Brexit goes smoothly, to tackle latent inflation pressures.

But the flatter gilt yield curve suggested markets saw little scope for BoE rates to rise further.

However, Ostwald warned against reading the flatter yield curve or US Treasuries' inversion as a warning of recession.

"The inversion rule only applies in eras like the 1970s or 1980s when benchmark rates are up in the sky. Then it can be a very good recession indicator. Otherwise it can often be a not very good steer," he said.