LONDON- British government bond prices soared on Wednesday after Prime Minister Theresa May's final gambit to win support for her Brexit plan failed to win over either opposition lawmakers or many in her own party.
Demand for inflation-linked debt was especially strong, as sterling fell to a five-month low and investors feared a spike in prices if Britain leaves the European Union without a deal later this year.
May has said she will set a timetable for her departure in two weeks' time. A poor showing by her Conservative Party in the European Parliament election, to be held in Britain on Thursday, could hasten her replacement by somebody more willing to accept a no-deal Brexit, such as ex-foreign secretary Boris Johnson.
"It's basically the political uncertainty ... and the prospect of a hard Brexit weighing on sterling," Royal Bank of Canada fixed income strategist Vatsala Datta said.
May appealed to lawmakers on Tuesday to get behind her deal, offering the prospect of a possible second referendum on the agreement and closer trading arrangements with the EU as incentives.
But the backlash was fierce. Both ruling Conservative and opposition Labour lawmakers lined up to criticise May's Withdrawal Agreement Bill, legislation which implements the terms of Britain's exit. Some stepped up efforts to oust her.
YIELDS
Yields on benchmark 10-year gilts shed 6 basis points by 1325 GMT to 1.03%, and real yields for their inflation-adjusted equivalents dropped 9 basis points, representing the biggest daily price gain in two months.
"Because of the slump in the currency, break-evens are going higher," Datta said, referring to the rate of inflation expected by investors in index-linked gilts.
Sterling weakened on Wednesday to its lowest level against the U.S. dollar since Jan. 4, down as low as $1.2644 and 5 cents weaker than at the start of the month.
The British currency is also now on track for its longest-ever losing streak against the euro.
JPMorgan raised the probability of an extension of Article 50 - which covers the Brexit process - to 60% versus 50% before and cut the probability of exit on the terms of May's Withdrawal Agreement to 15% from 35%.
Gilts outperformed German Bunds, with the spread between the twotightening by more than 3 basis points to its narrowest in six weeks at 110.2 basis points.
Financial market pricing showed just a 20 percent chance of a Bank of England rate rise by August next year BOEWATCH , in contrast to economists polled by Reuters last month who mostly expected a rate rise by March.
(Reporting by David Milliken; Editing by Gareth Jones) ((david.milliken@reuters.com; +44 20 7542 5109; Reuters Messaging: david.milliken.thomsonreuters.com@reuters.net))
