Brexit jitters, fund buying help UK gilts to biggest gains in two weeks

By David Milliken

LONDON (Reuters) - British government bonds recorded their biggest daily gains in more than two weeks on Wednesday, with demand bolstered by Brexit uncertainty, soft inflation data and relatively cheap prices that attracted pension funds.

Thirty-year gilts led the gains, with yields dropping 5 basis points on the day to 1.81 percent, as the bonds outperformed their U.S. and euro zone peers and yields fell to their lowest since June 6.

Ten-year yields dropped 4 basis points on the day to 1.365 percent, on track to close at its lowest since June 5. The fall in yield on both the 10- and the 30-year gilt represented the biggest price gains since May 29.

"There are a number of things going on. There are political concerns, there is concern over the data ... and the way the curve is bull-flattening is indicative of demand from pension funds," Nomura fixed income strategist Andy Chaytor said.

Prime Minister Theresa May looked set to avoid an embarrassing defeat in parliament on Wednesday over her post-Brexit trade plans, a day after she defused a rebellion in her party over control of Britain's exit from the European Union.

But RBC gilts strategist Vatsala Datta said concern about what May's concessions might mean for the longer-term stability of the government outweighed any optimism that the government was edging towards a softer Brexit.

"It's basically a can-kicking exercise. There's quite a lot of uncertainty, and the market doesn't like it," she said.

At times of general market uncertainty, investors tend to move into safer assets such as government bonds.

Already on Wednesday, pro-EU lawmakers who had backed May a day earlier threatened to withdraw their support for the government's Brexit strategy if May did not follow through on concessions they thought they had been promised.

Ultra-long gilts were also priced at levels that were more attractive to investors such as pension funds, after a glut of supply last month when Britain sold 6 billion pounds ($8 billion) of bonds maturing in 2071, Datta added.

"Given the degree of demand from pension funds overall, it was looking quite cheap," she said.

Chaytor said gilts were also supported at the margin by data earlier on Wednesday which showed no rise in consumer price inflation, despite a big jump in fuel prices in May.

Economists polled by Reuters mostly expect the BoE to raise rates in August for only the second time since the global financial crisis. Financial markets only see around a 50 percent chance of this, however, due to data showing only a small recovery in April from a weak first quarter.

Next week the BoE will announce its June interest rate decision and statement which analysts expect will shed some light on whether policymakers are getting closer to raising rates.

($1 = 0.7479 pounds)

(Reporting by David Milliken; editing by David Evans)