Two members of the Bank of England's (BoE) Monetary Policy Committee dropped their calls for higher interest rates this month, leaving the Monetary Policy Committee unexpectedly unanimous on record-low interest rates. Several policymakers also considered the case for more quantitative easing, the minutes showed.
The 10-year gilt yield broke through a record low 2.460 percent set last week in the middle of the session, and as price gains extended it set a fresh record low of 2.440 percent at 1458 GMT, 12 basis points down on the day.
Ten-year gilts outperformed Bunds , which also had a strong day, and the gilt/Bund yield spread narrowed by 2 basis points on the day to 21 basis points.
"We've got the BoE minutes that drove us one leg up, and then the 30-years outperformed, that gave us another leg, and then Bunds rallied," said Royal Bank of Scotland gilts strategist Andy Chaytor.
A Reuters poll released on Wednesday showed economists had pushed back their expectations for a first BoE rate rise to the fourth quarter of 2012, from the second quarter of 2012 consensus in a poll on Aug. 9. The chance of more QE has increased to 35 percent from 30 percent.
September gilt futures settled 98 ticks up on the day at 129.04, just shy of the contract high of 129.12 set on Thursday and outperforming Bund futures by almost 20 ticks.
Long-dated gilts outperformed the 10-year sector -- which Chaytor said was contrary to what a pure bet on more QE would imply, suggesting purchases by real money rather than speculative investors.
Thirty-year gilt yields fell 12 basis points on the day to 3.88 percent, while two-year gilts underperformed markedly in price terms, with yields falling just 6 basis points to 0.60 percent.
On Thursday the market will be watching the release of UK July retail sales data -- with growth forecast to slow from June -- as well as the launch of a new five-year gilt by the UK Debt Management Organisation.
Chaytor said the 4.5 billion pound auction should go well, though with choppy market conditions it was hard to be sure.
"It looked cheap even for a new issue. I'm sure overseas investors will be involved -- it's a favoured part of the curve for them -- but for liquidity reasons UK financial institutions also like that part," he said.
Copyright Reuters, 2011