Gilts rally after Fed opens door to more stimulus

YIELDS on UK government bonds saw their sharpest fall in 18 months, after the US?Federal Reserve said it was open to a new round of quantitative easing (QE) to help revive the flagging American economy.

The yield on the benchmark 10-year gilt dropped by 15 basis points to 2.97 per cent, the biggest drop since the Bank of England started buying up government bonds in March last year.

Gilts were given a further boost when the minutes from the Bank of England’s most recent Monetary Policy Committee (MPC) meeting showed increased concerns about the outlook for the economy.

But Sam Hill, a UK fixed income strategist at RBC Capital Markets warned it would be difficult to justify more QE with inflation already higher than target.

The UK rally tracked similar movements in the US gilts market, where yields on benchmark 10-year Treasuries slid to their lowest level in three weeks.

Gold prices saw yet another spike, with spot gold setting a record of almost $1,300 an ounce, while the dollar lost 1.5 per cent on a trade weighted basis, on fears that another round of stimulus would mean an effective devaluation of the currency.