UPDATE 1-UK two-year bond yields hit record low as COVID dents growth outlook

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LONDON, Dec 29 (Reuters) - British two-year government bond yields fell to an all-time low of -0.170% on Tuesday, down more than 6 basis points since pre-holiday trading ended on Christmas Eve as the risk of more widespread coronavirus restrictions mount.

Ten-year gilt yields dropped as much as 5 basis points to 0.207%, their lowest since Dec. 23 but well above the record low 0.074% struck during financial market turmoil at the start of the pandemic in March.

British markets were closed on Friday and Monday for public holidays, and Tuesday saw the first trading since Prime Minister Boris Johnson agreed an eleventh-hour post-Brexit trade deal with European Commission President Ursula von der Leyen.

Nomura economist George Buckley said the Brexit deal had largely been priced in before its formal announcement after markets shut on Christmas Eve, but this was not true for more recent coronavirus news.

“The deal avoids the need for wholesale revisions to our UK forecasts for activity and prices, both in the near term and looking further ahead. Unfortunately, the same might not be the case for the impact of tighter COVID-19 restrictions,” he said.

On Monday, Britain reported its highest daily number of new COVID cases since widespread testing began in mid-2020, and a top epidemiologist said on Tuesday that tougher curbs were needed to slow new, more infectious, variants of the disease.

Almost half of England’s population are under the country’s highest level of coronavirus restriction, which closes non-essential shops and many other businesses, and bans almost all face-to-face socialising.

Britain’s Resolution Foundation think tank warned on Monday that tighter restrictions meant that the economy could be 6% smaller by the end of the March than government forecasters had predicted in November, and called for more fiscal stimulus.

Financial markets are not pricing in a cut in Bank of England interest rates, however, following the 150 billion pound ($203 billion) expansion of its asset purchasing programme in November. ($1 = 0.7406 pounds) (Reporting by David Milliken, Editing by Paul Sandle and John Stonestreet)