Wednesday 4 March 2020 10:47 am

UK bond yields hit all-time low on coronavirus fears

UK government bond yields have fallen to an all-time low after the economic threat of coronavirus led the US Federal Reserve to slash interest rates, a move traders increasingly think the Bank of England will copy.

The yield on the 10-year UK Gilt touched 0.335 per cent this morning as investors rushed to buy one of the safest assets in the world, which are favoured at times of economic stress. Yields move inversely to a bond’s price.

Read more: UK services sector growth slowed by coronavirus

Coronavirus, which broke out in China in December, has caused the global economy to slow considerably. Containment efforts have kept people off work around the world and stopped them from spending, while supply chains have been severely disrupted.

In response, the US Federal Reserve – the world’s most powerful central bank – yesterday slashed interest rates by 50 basis points (0.5 percentage points) down to between one and 1.25 per cent.

The emergency move was the first time the Fed has cut rates in between scheduled meetings since the 2008 financial crisis.

The cut spooked traders and sent bond yields down around the world. Investors also rushed to buy government debt before yields fell further – and prices rose – on the back of more interest rate cuts.

Following the Fed’s move, investors increasingly think the Bank of England will slash interest rates. Traders currently think there is an 84 per cent chance of a 25 basis point cut down to 0.5 per cent. This expectation has driven down UK bond yields.

Read more: Federal Reserve slashes interest rates over coronavirus fears

“Gilts are stronger too ahead of a parliamentary testimony by Andrew Bailey, who will take over as Governor of the BoE in twelve days’ time,” said Emily Nicol of Daiwa Capital Markets.

Bailey will appear before parliament’s Treasury Committee today and could signal that the Bank is willing to cut rates.

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