The yield on UK ten-year government bonds fell to a record low below 2 percent on Friday in the wake of data that suggested Britain may be entering a recession.
However, trading volumes were extremely thin and analysts were reluctant to read too much into the move, noting that most market participants had already started the holidays due to the shortened trading session.
Official data showed output in the dominant UK service sector fell 0.7 percent in October, the biggest drop since April, and raising concerns the economy might have shrunk in the final quarter of this year.
The move accelerated from 0930 (when the data was released), said Shahid Ladha, strategist at BNP Paribas.
But I don't want to read too much into today's move because the market's very illiquid and winding down into Christmas.
At 12:10 p.m. BT, the yield on ten-year gilts was broadly steady at 2.035 percent, having dipped to an all-time low of 1.997 percent at 11:14 a.m. BT.
The premium investors demand to hold gilts versus German government bonds dipped briefly to a one-week low of 6 basis points.
Gilts have in recent months benefited from investors seeking the relative safety of government bonds as there is still no resolution in sight to the euro zone debt crisis.
But a weak outlook for the UK economy, which has encouraged the Bank of England to restart its quantitative easing programme, and expectations it will have to inject more stimulus to stave off a deep recession, have also supported the market.
John Wraith, a fixed-income strategist at BofAML, reckons that this combination of factors will drive the yield on ten-year gilts down to 1.85 percent in the second quarter of 2012.
The way things are going it could happen rather sooner than that, there's no strong reason to think they're about to turn around, Wraith said.
He added the low yield was a boon to the government which will have to borrow more than it envisaged in the coming years due to a weaker growth outlook.
The Bank restarted its QE programme to buy gilts in October with a 75 billion pound cash boost, and adding to the near 200 billion pounds of government bonds it purchased in a first phase of the programme between 2009 and 2010.
Most economists reckon the central bank will inject a further 75 billion pounds of stimulus in February, and minutes to the central bank's December meeting published this week showed some policymakers felt an expansion might be needed.
A QE boost of 75 billion pounds in February would take the Bank's total gilt purchases in 2011/12 to 150 billion pounds -- mopping up most of the 178.9 billion pounds of gilts that Britain plans to sell by the end of March 2012.
Analysts say that will give a particular boost to long-dated gilts, an area of the curve where demand is outstripping supply.
On a cross-market basis, gilts will keep rallying because of the prospects of further QE. The main thing is that supply is less than demand, especially at the long-end, and with the Bank buying, said Vatsala Datta, strategist at Lloyds Corporate Markets.
The March gilt future settled at 116.36, up 9 ticks on the day when the market closed at 12:15 p.m. BT. Markets will re-open after the Christmas break on December 28.
(Editing by Chris Pizzey)