Bonds: Gilts near record highs, Fitch positive on Portugal and Russia

These were some of the biggest moves in the most closely-followed 10-year sovereign bond yields:

US: 1.74% (+3bp)

UK: 0.48% (-4bp)

Germany: -0.58% (-2bp)

France: -0.25% (+1bp)

Spain: 0.26% (+4bp)

Italy: 1.81% (+27bp)

Portugal: 0.29% (+5bp)

Greece: 2.14% (+3bp)

Japan: -0.22% (-2bp)

Longer-term UK Gilts outperformed at the end of the week, keeping 10-year yields near the record lows hit at the start of the week and the interest rate curve inverted, the same as in the US, Germany and Japan.

Putting a bid into 10-year Gilts was data showing an unexpected contraction of 0.2% in British gross domestic product during the second quarter and weakness in Sterling.

On Monday, the yield on 10-year Gilts had plumbed a record low of 0.43% as the escalating trade war between the US and China led to 12th largest single-day outflow from equity funds ever, according to strategists at Bank of America-Merrill Lynch.

The past week also saw the largest outflow from high-yield debt since December 2018 and the biggest exit of funds from emerging market debt in 12 weeks, alongside a new high in the market value of negative yielding debt of $15.6trn or roughly 28.0% of the total.

Crucially however, said BofA-ML, investment grade bonds continued to see "big" inflows, while those into US Treasuries were described as "modest, not huge".

But perhaps the most important market event in fixed income markets on Friday didn't come until after the close, as debt rating agency Fitch announced its decision to keep its rating on Italy's long-term debt at BBB, despite the political uncertainty, albeit with a negative outlook, meaning it remained susceptible to a downgrade in the short-term.

BBB is Fitch's lowest investment grade rating.

"This week’s political developments reinforce our assessment at the previous review that the government was unlikely to see out a full term and there is an increasing risk of an early election from the second half of this year," Fitch said in a statement.

"There are downside risks to the fiscal outlook should a future government opt to disengage from EU fiscal rules and be more willing to risk financial market instability."

Separately, also on Friday, Fitch raised the outlook for the rating on Portuguese long-term debt from 'neutral' to 'positive' and raised the rating on that for the Russian Federation by one notch, to BBB, putting it on a par with that of Italy, Kazhakstan and Mexico.