UK 10-year gilt yields hit record low as investors flee to bonds

LONDON, Feb 10 (Reuters) - British 10-year gilt yields dived to a record low on Thursday, driven down by demand for low-risk government bonds as escalating concerns about the global economy sent stock markets slumping again.

U.S (Other OTC: UBGXF - news) . Federal Reserve Chair Janet Yellen said on Wednesday that the Fed was likely to stick to its plan to raise interest rates further this year, but investors nonetheless homed in on her comments about risks around the global economy.

The 10-year gilt yield bottomed at 1.295 percent and was last at 1.315 percent, down 10 basis points on the day. The 10-year gilt yield has fallen some 65 basis points so far this year, and 25 basis points this week alone.

Fears of recession have been sent the U.S. Treasury yield curve to its flattest since 2007, and the gilt curve has behaved similarly. Expectations that an economic downturn will keep interest rates lower for longer can prompt investors to scoop up higher-yielding long-dated debt, causing the yield curve to flatten or even invert.

The spread between two-year and 10-year gilt yields narrowed to 98 basis points, its flattest since January last year and not far off its levels around October 2008, shortly after the collapse of Lehman Brothers.

"It's a risk-off market," said Societe Generale (Swiss: 519928.SW - news) strategist Jason Simpson, adding that the record low 10-year gilt yield reflected global movements rather than anything specific to Britain.

"Yellen was dovish, but really didn't offer risk assets anything material to go on. Gilts are playing a bit of catch up with the big moves in U.S. Treasuries."

At 1030 GMT, Britain auctions 1.5 billion pounds ($2.17 billion) of the benchmark 30-year gilt.

While the low yields present a "challenging" environment for gilt sales, Simpson reckoned the small size of the auction and the fact the gilt was the highest yielding across the curve should ensure the sale will be covered.

March long gilt future 122.75 (+0.98)

June 2016 short sterling 99.42 (+0.01)

Dec (Shanghai: 600875.SS - news) 2016 short sterling 99.44 (+0.03)

10-year gilt yield 1.315 pct (-10 bps)

-------------------KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO ($1 = 0.6915 pounds) (Reporting by Andy Bruce; Editing by Catherine Evans)