Monday 27 June 2016 3:04 pm

UK bond yields fall to a new record low, despite looming debt downgrades

Borrowing costs for the UK government have dropped to their lowest on record as investors flock to the safe haven of government debt in the midst of Brexit uncertainty.

Yields on the benchmark 10-year Treasury bonds plunged to 0.94 per cent, down an unprecedented 0.14 percentage points – or 14 basis points – since yesterday.

It is the first time the amount payable in interest on 10-year UK debt has fallen below one per cent, having already been at their lowest ever level in the run-up to the vote, and means investors will receive just 94p in interest on every £100 of long-term government debt they own.

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Lower yields typically indicate investors have more faith in the ability of the issuer of that debt to pay it back. By comparison, yields on 10-year debt issued by the Greek government are currently 8.7 per cent. For Germany they are minus 0.11 per cent, meaning investors pay the government to keep their money safe.

The fall in yields comes even as all three major credit ratings agencies cut the outlook on the UK's credit rating to negative and the probability of the UK government defaulting on its debt jumped to its highest level in three years.

Analysts said it was precisely because of the uncertainty that yields were falling, pointing out the possibility of interest rate cuts from the Bank of England also played a part.

Neil Williams, chief economist at Hermes Investment Management told City A.M.: "In the rating agencies' eyes, Brexit is putting the UK's credit worthiness under the spotlight. But the referendum outcome is only the latest chapter in what will prove to be a protracted story of lower-for-longer bond yields.

"Brexit, and its likely ripple effects, is an added incentive for central banks to keep their liquidity taps on.

"In short, despite ratings downgrades, with the UK's government debt being local-currency denominated and the Bank of England waiting in the wings, default risk in reality looks next to zero."

Markets are now fully pricing in a cut to interest rates this summer – most likely in August – and Hargreaves Lansdown analysts said there was a 15 per cent chance governor Mark Carney would introduce negative interest rates this year.

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"The gallop to buy government bonds at one level is quite understandable," added Russ Mould, investment director at AJ Bell. "Uncertainty about the economic and political outlook dominates and during such times investors tend to look for a haven."

Bell pointed out, however, that a stubbornly weak – or volatile – pound could reduce the attractiveness of government debt to overseas buyers, lowering demand and pushing yields up. Moreover, if a new government abandons the relatively tight fiscal stance and decides to stimulate the economy, this could lead to higher inflation, meaning investors demand a better yield on government debt.