UK gilts rally as BoE slashes interest rates, widens QE net

The UK gilts rallied Thursday as the Bank of England, in its monetary policy meeting, lowered its key interest rate by 25 basis points to 0.25 percent. It has also announced to increase the quantitative easing by an additional 70 billion pounds and signalled of near-zero rates ahead.

The yield on the benchmark 10-year gilts fell 15 basis points to 0.659 percent (new record low), the yield on super-long 40-year bond also dipped 14 basis points to 1.341 percent (fresh record low) and the yield on short-long 2-year bond slid 10 basis points to 0.097 percent (new record low) by 11:20 GMT. The 10-year Gilt/T-note yield spread of -84 basis points is at a 16-year low.

The central bank’s MPC meeting has ended the decisions with a 0.25 percent (25 basis points) cut of bank rate to a record low of 0.25 percent, from 0.5 percent previously. This was the first such move since March 2009.

It has also declared to increase the quantitative easing (QE) by an additional 60 billion pounds of gilt and top-tier corporate bond purchases of 10 billion pounds, which shall be financed via reserves issuance.

Though the bank rate cut was widely expected, but the quantitative easing was not factored in and neither was the forward guidance of the likelihood of a further cut in the Bank Rate to close to zero during the course of the year.

Looking ahead, we foresee that this decision has created an opportunity to go long as the outcome is construed as supportive for the gilts.

Meanwhile, the FTSE 100 traded 1.47 percent higher at 6,733.10 by 11:30 GMT.