LONDON: British government bond prices rose on Thursday and rate futures surged in turbulent trading as investors scaled back bets on future Bank of England rate hikes after the BoE said gilt yields had risen more than economic conditions warranted.
In an unexpected statement after new governor Mark Carney's first Monetary Policy Committee meeting, the BoE said the "significant upward movement" in yields over recent weeks would weigh on its expectations for growth and inflation.
"In the Committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy," the statement added.
BNP Paribas fixed income strategist Shahid Ladha said futures markets had subsequently written off one of the two quarter-point rate rises that they had pencilled in for the next two and a half years.
"The statement gave a big clue that forward guidance is set up for August. We're seeing a big repricing of rate expectations across the market," Ladha said.
Short sterling rate futures - which reflect BoE rate expectations - were up strongly across the strip, with March 2014 contracts settling 8 ticks up on the day at 99.37 and September 2015 contracts 12 ticks higher.
Gilt futures surged 80 ticks in the immediate aftermath of the decision, and gained further after the European Central Bank pledged to keep interest rates low for an extended period.
But the ECB's move later caused gilts to pare gains as share prices surged and investors judged the change may boost the growth prospects of countries on the euro zone's periphery, reducing demand for safe-haven assets such as gilts.
"The extension of verbal rate guidance from both the ECB and BoE has helped improve market liquidity expectations, prompting investors to shun haven trades at the expense of riskier trades," said Lena Komileva, director of consultancy G+ Economics.
September gilt futures settled just 3 ticks higher on the day at 112.40, far below a session high of 113.06.
Ten-year gilt yields were 2 basis points lower on the day at 2.38 percent, but well off an earlier low of 2.328 percent.
Five-year gilts - which are more sensitive to rate expectations - clung on to more of their price gains, with yields finishing 5 basis points down at 1.38 percent.
Gilts heavily outperformed German debt for a brief period before the ECB announcement, but the 10-year yield spread finished the day little changed at 73 basis points, having earlier sunk below 69 basis points.
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