UK gilt yields plunge after Fed rate cut
By Paul Hughes
LONDON, Nov 7 - Gilts futures shot to a new contract high and yields on short-dated paper plunged in early Wednesday trade after the U.S. Federal Reserve cut its key lending rate to the lowest level since 1961. The December future contract for 10-year gilts surged to a new contract high of 119.31, 52 ticks above Tuesday's close, before settling back.
Yields for two-year cash gilts sank to 3.944 percent from an opening level of 4.035 percent, leaving bond analysts searching for when yields had last been so low.
"It's a multi-year low, we're talking about 40 or 50 years," one said.
Ten-year cash yields fell to 4.378 percent, from an opening level of 4.436 percent.
"Clearly there's a lot of momentum. The market is very bullish," said Kirit Shah of Sanwa International.
The half point cut in the federal funds rate, the 10th cut this year, was seen as raising the likelihood of similar aggressive easing by the European Central Bank and the Bank of England's Monetary Policy Committee (MPC) on Thursday.
"This could tip the balance between a 25 basis point and 50 basiss point easing by the ECB," one trader said.
"The data flow has been so bad in recent days that half-point cuts could easily be justified. The key thing here in Britain is that inflation expectations are close to zero," said Shah.
Shah said recent signs that the UK housing market was starting to ease could persuade some members of the MPC who were concerned about over-stoking consumer demand with aggressive rate cuts, to cut its key lending rate by half a point to 4.0 percent.
Traders said the run-up in bond prices in recent days had been sustained by heavy cash flows, both from pension funds and from maturing bonds.
Nevertheless, there was a felling among some that bonds had run ahead of themselves.
"I thought they were already toppy but today puts us in unchartered territory," one trader said.
Interest rate futures, known as short-sterling also surged and are now pricing in UK interest rates at 4.0 percent by the end of the year and down to 3.75 percent by next March.