UK 30-year yields fall below 1% for first time on record

LONDON (Reuters) - British 30-year government bond yields GB30YT=RR fell below 1% for the first time on record on Thursday, after investors flocked into safe fixed-income assets on growing fears of a global recession.

Traders are seen at work at Northern Trust offices in London, Britain August 1, 2019. REUTERS/Toby Melville

Lower bond yields reduce the cost of new government borrowing, but also act as a signal that financial markets expect slower growth and cuts in Bank of England interest rates.

Yields on 30-year gilts hit a low of 0.988% at 1139 GMT, down 8 basis points on the day, and remained around 1% at 1400 GMT. Ten-year GB10YT=RR and 20-year gilt yields GB20YT=RR also hit record lows of 0.414% and 0.85% respectively.

“We see a high risk of the market unwittingly launching itself into a pattern of trades that make a recession essentially self-fulfilling, barring the emergence by the end of August of some positive news,” Nomura strategist Masanari Takada said in a note to clients.

Trade conflict between the United States and China has stoked fears that the world economy is heading for a downturn, a concern that intensified on Thursday after China said it would impose retaliatory tariffs.

Markets are also betting that the Bank of England will be forced to cut interest rates before the end of the year if Britain leaves the European Union on Oct. 31 without a transition deal to reduce economic disruption.

There was little reaction to July retail sales data which showed less of a slowdown than forecast.

The yield curve for two-year and 10-year gilts GB2GB10=RR remained inverted for a second day, with a negative spread of 4.5 basis points, mirroring a move in U.S. Treasuries that is widely seen as a warning of recession.

But the rally in 10-year gilts could not keep up with the bond's German equivalent EU10YT=RR, and the yield spread between the two rose to its highest during main trading hours since July 2 at 112 basis points. DE10GB10=TWEB.

Thirty-year UK yields have fallen by a hefty 40 basis points since the start of the month and are half their level at the end of last year.

“These are massive moves, driven by fears over the economic outlook and policy and political uncertainty,” said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers.

“Investors need safe assets and have woken up to the value of long-dated bonds in terms of protecting capital and delivering positive returns when equities are under pressure,” he added.

Sept long gilt future FLGcv1 135.04 (+0.21)

Dec 2019 short sterling FSSZ9 99.30 (unch)

10-year gilt yield GB10YT=RR 0.43% (-2 bps)

Reporting by David Milliken, editing by Andy Bruce