U.K. Yields Hit Record Low on Election Risk, Global Trade Woes

(Bloomberg) -- U.K. government bonds rallied, driving benchmark yields to a record low, as global risk sentiment worsened and speculation swirled that the nation’s new Prime Minister is preparing for a general election.

Ten-year gilt yields slipped below 0.5% for the first time on a potential increase in U.K. political uncertainty, with Premier Boris Johnson’s spending plans fueling speculation about a snap vote even as he denied it. The pound erased early declines that were fueled by a broader risk-off move across markets after the latest escalation in U.S.-China trade tensions.

U.K. Yields Hit Record Low on Election Risk, Global Trade Woes

“We can see a clear demand for global fixed income so global and idiosyncratic factors add appeal to the gilt market,” said Theo Chapsalis, head of U.K. rates strategy at NatWest Markets. “August has historically been a strong month for duration so there are tactically still good reasons to like fixed income and in particular gilts.”

The yield on 10-year gilts fell as much as six basis points to 0.49%, an all-time low. The pound was little changed at $1.2164, after falling as much as 0.5% earlier to $1.2102. Sterling weakened 0.5% to 91.81 pence per euro, after earlier touching the weakest since September 2017.

Steeper Curve

After steepening last week, the U.K. yield curve pared the move despite Johnson’s additional spending commitments. For now, investors are focusing more on the political uncertainty given the possibility of an early election rather than the implications of extra government spending, according to Aberdeen Standard Investments.

“Gilts obviously have had a bit of a kicker as the market is quite aggressively coming to terms with Boris’s stance and the rhetoric emanating from the camp,” said James Athey, a fund manager at Aberdeen. “The long end has been steepening but i think the market struggles to see that far into the future.”

U.K. government bonds also remain attractive to investors given the Bank of England has more room to ease policy than some other central banks, with its benchmark rate still in positive territory. The central bank has said it could hike or cut borrowing costs in the event of a no-deal Brexit.

For the pound, the outlook remains gloomy. A pickup in services sector activity led the currency to pare earlier losses Monday but the broader global risk-off move and the domestic political turmoil are likely to keep sterling on the back foot, according to Nomura International Plc.

“Given the turn of risk sentiment, Brexit and geopolitics, it is surprising that we are not already witnessing the pound making new lows,” said Jordan Rochester, an analyst at Nomura. “It seems only a matter of time, with the U.K. on a near snap election footing and the U.S.-China talks finding little way of de-escalating anytime soon.”

©2019 Bloomberg L.P.

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