Following Mark Carney’s speech yesterday (30 June) the UK has now seen its first negative yielding gilt.
The Bank of England’s governor hinted at interest rate cuts and further monetary policy stimulus this summer, explaining the Monetary Policy Committee would make an initial assessment next month and discuss its options in August.
“It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected,” he commented.
Sterling fell following his comments, but was steady again this morning (1 July) at $1.3208, though not far above the 30-year trough of $1.3118 it hit at the start of the week.
Benchmark government bond prices, which move inversely to their yield, have surged as central banks keep interest rates lower for longer, with the 10-year gilt yield down 3 basis points to a record low of 0.84 per cent on expectations the Bank of England may cut borrowing costs next month.
Mitul Patel, head of interest rates at Henderson Global Investors, stated one gilt maturing in March 2018 traded at minus 0.04 per cent, as expectations for further easing from the MPC increased.
“The market now expects interest rates to fall to close to 0 per cent, and whilst Carney has previously stated a dislike of negative interest rates, nothing can be taken off the table,” he said.
The UK now joins Germany, Austria, the Netherlands, Denmark, Switzerland and Japan in the club of countries where gilt yields have turned negative.
As a result of the governor’s speech, markets are now expecting an interest rate cut, and/or more quantitative easing over the summer, which has pushed fixed interest rates down. The benchmark UK 10 year gilt is now yielding 0.87 per cent, down from 1.37 per cent before the referendum vote and 4.5 per cent before the financial crisis.
Meanwhile the stock market has risen sharply since yesterday evening, as a 3.5 per cent dividend yield now appears more attractive than interest rates on cash and bonds, according to Hargreaves Lansdown.
The stock broker’s senior analyst Laith Khalaf commented: “The stock market likes falling interest rates and the accompanying fall in the pound, so understandably the Footsie rose on the back of Mark Carney’s comments.
“In a world where you have to pay money to lend to the government, an investment in the stock market which pays you three to four percent a year looks attractive, even if it can be volatile.”
The FTSE 100 was up 0.4 per cent, the pan-European Stoxx 600 added 0.5 per cent and US index futures suggest the S&P 500 will dip just three points to 2,095.
The S&P 500 sits more than 100 points above Monday’s intraday low and the FTSE 100 is nearly 13 per cent higher than last Friday’s trough, hovering at its best level in 10 months.