LONDON: British government bond yields plunged to a six-week low on Tuesday, after traders returned from the Easter break to confront Friday's weak US payrolls data and renewed concerns about the euro zone debt crisis.
These worries about the global economy drove investors into safe-haven assets, triggering the biggest one-day rise in 10-year gilt prices in more than four months as prices continued to climb after US markets opened and small businesses there reported the first decline in confidence in six months.
Gilts also outperformed German government debt, with the yield spread tightening to the bottom end of the past month's trading range, after signs of global economic weakness reawakened the prospect of further asset purchases by the Bank of England.
Ten-year gilt yields slumped by more than 15 basis points to hit 2.006 percent by 1544 GMT - the lowest yield since Feb. 28 and the biggest one-day fall in yield since Nov. 1, when Greece mooted a referendum that could have derailed its debt bailout.
"It's a combination of euro area concerns and obviously the US payrolls numbers, which some people believe calls the US recovery into question. Those two issues are going to continue to worry the market," said Lloyds gilt strategist Eric Wand.
Friday's US payrolls data showed that the world's biggest economy created just 120,000 non-farm jobs in March, the smallest number since October and far below expectations for 203,000. And Spain suffered a poor bond auction on Wednesday, casting a pall over efforts to ease the euro zone debt crisis.
Britain's financial markets were shut for Easter holidays on Friday and Monday, and gilt prices surged when trading restarted on Tuesday. The June gilt future hit a contract high of 116.72, and settled 190 ticks up on the day at 116.65.
Share prices were down more than 2 percent in London, and 10-year Bund yields returned to the record low of 1.637 percent set in September.
"US payrolls on Friday were a big surprise. However this concern is also about the sovereign spreads in Europe, which is driving Bund (yields) lower and having a knock-on effect for gilts as well. Most people are keeping an eye on Spain in particular," said Morgan Stanley strategist Anthony O'Brien.
Gilts outperformed Bunds, with the future outpacing the equivalent German contract by around 70 ticks. The spread between 10-year gilts and Bunds tightened by 6 basis points to 36.5 basis points.
Wand said the poorer global economic news - which also follows data on Thursday showing an unexpected fall in British factory output in February - revived the prospect of further quantitative easing by the BoE. Until now, signs of economic recovery and an easing in the euro zone debt crisis had made
most economists discount the likelihood of more QE in May.
The main domestic focus for the gilt market this week falls on two auctions, with 4.5 billion pounds of 1 percent 2017 gilts due for sale on Wednesday and 2 billion pounds of 4.25 percent 2032s due on Thursday.
RBC strategist Sam Hill said Tuesday's sharp rise in gilt prices could dent demand for the five-year gilt. But O'Brien said that at 1.12 percent, the yield offered by the 1 percent September 2017 gilt was notably better than the 0.94 percent yield on the August 2017 gilt.
Wand also thought that the gilt would find plenty of takers. "It's still pretty rich but I think the five-year sale won't have too much of a problem finding a home in this environment - even if yields are not quite where people would want them," he said.