U.K. May Be Next to Join the Negative-Yield Club, Says Citigroup

(Bloomberg) -- The U.K. leaving the European Union without a deal may see benchmark yields slide to zero or even lower, according to Citigroup Inc.

Gilts just completed a four-month rally amid a global debt surge, with 10-year yields hitting a record low on Aug. 15. While some investors expect the advance to soon falter, Citi strategists including Jamie Searle see room for more gains as the threat of a no-deal Brexit meets the worsening global economic gloom that’s forcing central banks to turn more dovish.

Gilts gained in recent weeks on demand for the safety of government debt as the odds of a no-deal outcome was boosted by Prime Minister Boris Johnson’s move to suspend Parliament for a month from Sept. 12. That gives members less time to deliberate on or block his plans ahead of the Oct. 31 departure deadline. This week could prove decisive for U.K assets with lawmakers back from summer recess looking to force Johnson to seek another Brexit delay.

“Previously, we thought that 10-year yields would fall to 0.4%-0.5% under a no-deal scenario -- that’s clearly been outdated as the global economic backdrop has changed materially,” Searle, a strategist at the bank, wrote in a client note. “It’s not all about Brexit. Global themes inspiring never-normalization keep the curve flat to 10s and dominate domestic inflation and fiscal risks.”

The yield on 10-year gilts was at 0.43% Monday, having slipped more than 70 basis points since the end of April. It touched an all-time low of 0.404% on Aug. 15. The median estimate of analysts in a Bloomberg survey is for the yield to climb to 0.77% by year-end. Benchmark yields are already negative in several European markets including Germany, France, the Netherlands and Ireland.

If the U.K. and EU were to reach an agreement, 10-year gilt yields will probably climb to 0.75% but may slip back again eventually to 0% if the U.S. economy enters a recession, according to Searle.

The flattening of the U.K. bond curve out to the 10-year tenor shows that “global uncertainties and secular stagnation themes are dominating the curve over domestic risks and may continue to do so,” he wrote.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

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