The price of government debt in both the UK and Germany hit record lows today, as investors rushed into safe haven assets with the EU referendum and further monetary stimulus on the horizon.
The yield on the benchmark 10-year UK bonds hit 1.22 per cent this morning, the lowest since Bloomberg starting tracking the cost of debt in 1989. The 10-year German bund edged down to 0.05 per cent as Commerzbank analysts hinted it could turn negative within the next week.
Referendum fears in the UK could be responsible for pushing investors away from riskier assets like equities, currencies, commodities and property and into the relative safety of government debt.
"The low yield on government bonds paints a pretty pessimistic picture of the global economy, and suggests we are set for an extended period of low or negative inflation, and weak economic performance," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
The Bank of England has said it may have to look at additional monetary stimulus if the UK votes to leave. Either lower interest rates or an extra bout of quantitative easing would, in theory, push down the cost of borrowing government debt by creating extra demand. Therefore, today's market prices could be partially pricing in the possibility of further falls in yield prices.
However, there are also longer-term factors at play, according to Nick Gartside, international chief investment officer at JP Morgan. "There is clearly uncertainty around the referendum, and anytime you get uncertainty government bonds are a beneficiary of that.
"But the UK economy is slowing, and has been slowing now for 18 months – both significantly highly growth and significantly higher inflation [which could push yields higher] are absent," he told City A.M.
Gartside said he could see yields dropping below one per cent in the event of a vote to leave, whereas in Germany it was "only a matter of weeks before they go through zero".
|June 2015||0.95 per cent||2.09 per cent|
|May 2016||0.13 per cent||1.40 per cent|
|June 2016||0.05 per cent||0.95 per cent|
Yields have fallen 0.11 percentage points – a dramatic shift with returns already so low in such a deep market – from 1.34 per cent last week.
German borrowing costs have also collapsed over the last year, falling from 0.95 per cent to 0.05 per cent during the first year of the European Central Bank (ECB)'s quantitative easing programme.