UK 10Y gilt yield slides to new low of 1.10 pct, likely to dip further before EU referendum

The UK gilts continue to strengthen on Thursday as investors have grown increasingly jittery after the recent opinion polls indicated that the momentum is growing for the leave camp.

Also, demand for fixed income securities increased after the Federal Open Market Committee (FOMC) kept its benchmark lending rate unchanged and lowered its economic growth expectations and rate path outlook.

The yield on the benchmark 10-year gilts fell 2 basis points to all-time low of 1.105 percent, yield on super-long 30-year bonds also dipped 2 basis points to 1.923 percent and the yield on short-term 2-year note tumbled 3 basis points to 0.324 percent by 07:30 GMT.

Moreover, the Bank of England is expected to stay on hold at its monetary policy meeting scheduled for today at 11:00 GMT and it is the final one before the continued EU membership referendum on 23rd June. The meeting is universally expected to end in the decisions to maintain the official Bank Rate at 0.5 percent and keep the programme of asset purchases paused at 375 billion pounds. But given the backdrop of weak inflation, moderate wage growth, and the uncertainty-driven slowdown in real sector economic activity as the 23rd June EU referendum date draws closer, the BoE was not likely to do anything anyway.

Apart from this, the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50 percent range, as expected. One key highlight of the statement was the note that the pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up, adding that although the unemployment rate has declined, job gains have diminished.

Also, FOMC diminished outlook for growth coupled with largely downgraded forecasts for the overnight rate, though median expectations remain unchanged for 50 basis points worth of tightening in 2016.

The June statement reiterated that inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Additionally, the June statement repeated that inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further. In terms of risks, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

In addition, the latest polls by various corporate bodies in the United Kingdom in run up to the June 23 Brexit referendum indicate that the percentage of citizens in favor of "leaving" the European Union (EU) has outnumbered those who want to "remain", raising the possibility that Britain might leave the EU after 43 years of membership in the bloc.

According to a new UK poll by Ipsos-Mori, 53 percent participants favoured leaving the EU and 47 percent supported for remaining. This is in line with the other recent surveys showing a swing to a moderate pro-Brexit balance, but contrasts markedly with the previous IPSOS-Mori poll in May that found a double-digit net balance in favour of 'Bremain'.

Today, crude oil tumbled more than 1 percent for six straight days, dragged by a somewhat disappointing U.S. oil data and looming risk of Britain’s departure from the European Union. The American Petroleum Institute (API) showed U.S. crude inventories rose by 1.2 million barrels in the week to June 10 to 536.7 million, against market consensus for a decrease of 2.3 million barrels. The International benchmark Brent futures fell 1.08 percent to $48.44 and West Texas Intermediate (WTI) dipped 1 percent to $47.53 by 07:25 GMT.

We foresee that the benchmark 10-year gilts yield likely to slid below 1.10 percent ahead of Britain’s referendum on European Union membership.

Meanwhile, The FTSE 100 trading down 0.62 percent at 5,930 by 08:00 GMT.