Bonds News

REFILE-Sterling falls, gilt yields hit record lows, after BoE cuts rates and restarts QE

(Refiles to remove repeated “on Thursday” in 1st paragraph)

LONDON, Aug 4 (Reuters) - Sterling fell sharply and British gilt yields hit record lows on Thursday, after the Bank of England cut interest rates for the first time since 2009 and said it would buy 60 billion pounds of government debt.

As well as cutting rates to a record-low 0.25 percent, from 0.5 percent previously, the BoE launched two new schemes, one to buy 10 billion pounds of high-grade corporate bonds and another - potentially worth up to 100 billion pounds - to ensure banks keep lending even after the cut in interest rates.

Sterling briefly ticked higher after the decision, hitting the day’s high of $1.3352 before falling around 2 U.S. cents to a three-day low of $1.3155, down 1.3 percent on the day. The pound also weakened by 1 percent against the euro to 84.585 pence.

British five- and 10-year government bond yields hit record lows of 0.222 percent and 0.675 percent respectively, according to Reuters data. Short sterling interest rate futures <0#FSS:> rose sharply, up between 6 and 10 ticks across the 2017 and 2018 contracts.

“The move to cut rates by 25 basis points is expected,” said Mizuho’s head of hedge fund FX sales in London, Neil Jones. “However, a 60 billion pound push on the QE lever is a major surprise - the market was not expecting that. Sterling should continue lower.”

Money markets immediately moved to price in a chance of the Bank cutting interest rates further, with five-month overnight interbank offered rates falling 5 basis points to 0.1090 percent

Euro zone bond yields also fell. German 10-year yields, the bloc’s benchmark, were down 4 bps at minus 0.14 percent, according to Tradeweb.

Britain’s FTSE 100 turned positive following the BoE decision, with the blue-chip index last trading 1.3 percent higher after hitting a three-week low earlier in the day.

The mid-cap FTSE 250 index, dominated by domestically-focused companies, extended gains to trade 1 percent higher. However, Lloyds Banking Group and Royal Bank of Scotland hit lows for the day after the central bank’s move. (Reporting by Jemima Kelly, Andy Bruce, John Geddie, Patrick Graham and Atul Prakash; Editing by Nigel Stephenson)