Yields on two long-dated Treasury gilts have fallen below 1 per cent in the same week Mervyn King warned that a sudden rebound in long-term rates could spark a crash in asset prices, market data showed yesterday.
The Governor of the Bank of England said it would be dangerous if policymakers took real lower interest rates for granted.
Yesterday Sir Andrew Large, his outgoing deputy, repeated the warning, saying there was a "non-zero risk" of a crash on the financial markets.
Yields on nominal and index-linked ultra-long bonds have plunged in recent sessions as pension funds have lined up to buy securities to match long-term liabilities with safe investments.
The real yield on the 50-year index-linked gilt has halved from 1.1 per cent when it was issued four months ago to 0.57 per cent this week. The 20-year linked gilt was yielding 0.9 per cent yesterday.
The Debt Management Office, an executive agency of the Treasury, said it was monitoring conditions in the market. The DMO has the legal power to issue extra government debt in "exceptional circumstances" after consultation with the Treasury.
Analysts and traders in the City are growing increasingly concerned that demand for long-dated gilts has risen so strongly it has driven the price - which moves in the opposite direction to the yield - to unsustainable levels.
Jeremy Toner, a fixed-income portfolio manager at Investec Asset Management, said: "It has created a bubble and arguably a disorderly market. This bubble will eventually burst when pension demand for bonds falls."Reuse content