A cocktail of trade tensions and Brexit risks has driven UK bond yields to a record low, as investors ignore slightly stronger economic data to pile into haven assets.
UK debt was swept up in global rally on Monday morning, pushing 10-year gilt yields below 0.5 per cent. The yield has now dipped below its previous August 2016 trough, which came after the Bank of England slashed interest rates to an all-time low in the wake of the vote for Brexit.
The latest gains for government debt came as the weakening of the Chinese renminbi beyond the closely watched Rmb7 per dollar mark signalled a new phase in the US-China trade skirmish. Investors increasingly fear an all-out currency war with global central banks competitively cutting interest rates.
In Europe, UK government bonds led the gains, with the looming prospect of a no-deal Brexit providing an extra boost.
“The UK faces an unhelpful combination of global risks and Brexit,” said David Page, senior economist at AXA Investment Managers. “There’s this continued speculation about an early election and the possibility that could be used to facilitate a no-deal Brexit.”
Investors have bought gilts recently as no-deal risks ratchet higher, on the assumption that leaving the EU without an agreement will hit the economy and force the Bank of England to cut interest rates in response. Traders are pricing in a 55 per cent chance of a rate reduction by December, ticking up slightly on Monday.
The moves came despite purchasing managers’ data from IHS Markit which showed the key services sector expanded faster than expected in July.
Mr Page said that UK government bonds would continue to look attractive to some investors despite record-low yields: “Ten-year yields are still about a percentage point higher than their German equivalent. By comparison to negative yields in Europe, any kind of positive yield looks good.”