Gilt prices were pushed even higher on the back of the Budget after the chancellor George Osborne stated he would need to issue less of the securities than the market predicted.
Mr Osborne said he would need to issue £133bn worth of gilts in the 2015/16 financial year, which was roughly £7bn more than this financial year before but some £12bn less than the market thought he would have to issue.
Stewart Robertson, senior economist at Aviva Investors, said the asset class had reacted to the fact the government would need to sell less debt as the country’s finances improve.
“Ten-year yields fell to their lowest in five weeks as Mr Osborne said the government plans to sell £133.4bn of bonds in the year to April 2016, nearly £12bn less than the market had expected,” he said.
“Issuance will be skewed towards debt with longer maturities. Mr Osborne resisted the temptation to make this too much of a give-away budget ahead of May’s general election.”
The prospect of less supply, as well as a pledge to reach a budget surplus by 2019, meant the prices of gilts rose strongly in the wake of Mr Osborne’s speech. Index-linked gilt prices were driven particularly strongly.
John Anderson, a fixed income manager at Smith and Williamson, said: “The market rallied strongly because the amount of issuance was not as much as expected and the market is all about expectations.”
The gilt investors that got the most “bang for their buck” from the Budget, Mr Anderson said, were those in index-linked bonds – particularly long-dated index-linked bonds, which went “ballistic”.
“There was a 2068 index linked bond that was up over 10.5 basis points,” he said. Conventional long-dated bonds were up just about 2 basis points.”
Mitul Patel, deputy head of interest rates at Henderson Global Investors, said he expected this was the second best day for index linked gilts.
However, Mr Anderson said he thought the market “tends to overdo it,” adding if the securities continued to rally at this strength then he would be tempted to sell.
In terms of the planned issuance for 2015/16, the chancellor said there would be £33.9bn of short conventional gilts (25.4 per cent of total issuance), £26.7bn of medium conventional gilts (20 per cent of total issuance), £37.4bn of long conventional gilts (28 per cent of total issuance) and £31.4bn of index-linked gilts (23.5 per cent of total issuance).
There is also an unallocated supplementary amount of sales amounting to £4bn.