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UK 2-5 year gilt yield curve inverts for 1st time since 2008

By Andy Bruce LONDON, July 3 (Reuters) - The yield curve between two- and five-year British government bonds inverted for the first time since 2008 on Wednesday, sending a recession risk signal as investors doubled down on bets that the Bank of England will cut interest rates. On Tuesday, BoE Governor Mark Carney said a global trade war and a no-deal Brexit were growing risks to Britain's economy which might need more help to cope with a downturn, prompting investors to increase their bets on a BoE rate cut. The five-year yield dipped below the two-year yield in early trade on Wednesday for the first time since August 2008, when the global financial crisis was about to reach a climax, according to data from Refinitiv. As of 0810 GMT both the two- and five-year gilt yields stood at around 0.500%, down around 2.5 bps on the day. Normally, a yield curve slopes upwards as investors expect to be compensated for taking on the risk of owning longer-maturity debt. An inversion - when shorter-dated yields are higher than longer-dated ones - is generally considered a warning of a risk of recession. The curve in the United States has inverted before each U.S. recession in the past 50 years, and it is inverted now. It offered a false signal just once in that time. The BoE says its interest rates are likely to rise if Britain can agree a Brexit deal. But investors think that outcome is becoming more distant, meaning rate cuts are looking more likely to investors than hikes. Both candidates to succeed Prime Minister Theresa May have said they are prepared to take Britain out of the European Union without a deal if necessary. A BoE rate cut is now fully priced in by early 2020, according to overnight index swaps dated to meetings of the BoE's monetary policy committee, according to data from ICAP. The 10-year gilt yield fell to its lowest level since September 2016 at 0.697%, down 3 bps on the day. On Tuesday, the 10-year yield fell below the BoE's Bank Rate first time in a decade after Carney's speech. The gap between 10-year gilt and German Bund yields was unchanged on the day at 109 bps. Euro zone bond yields hit new record lows on Wednesday after a decision by EU leaders to pick France's Christine Lagarde as next European Central Bank chief reassured markets that the central bank's dovish stance would remain in place. Sept long gilt future 131.95 (+0.38) Sept 2019 short sterling 99.275 (+0.015) Dec 2019 short sterling 99.28 (+0.01) 10-year gilt yield 0.70 (-2.6 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 (Editing by William Schomberg)

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