Fixed Income  

Gilt yields rise above 1% for first time since Brexit

Gilt yields rise above 1% for first time since Brexit

Yields on gilts have returned to the level seen on the day of the EU referendum result.

For 10-year gilts, the benchmark yield has risen above the 1 per cent mark, after rising sharply over the past week, from 0.73 per cent last Monday (3 October).

Despite 1 per cent being an exceptionally low level by historical standards, this yield is almost double the 0.52 per cent yield reached on 12 August, when it hit its lowest point.

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Since the financial crisis in 2008, gilts have become an increasingly volatile asset class, particularly since interest rates were cut to historic lows. 

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the yield on a 10-year gilt has risen in tandem with sterling’s decline. 

He said the implication is that overseas investors are dumping sterling assets, including government bonds, as fears over a hard Brexit appear to be gathering momentum. 

“This sell-off hints at the damage that could be done to bond portfolios if interest rates were to rise to more normal levels,” he said, adding that while this is a distant prospect, such low yields don’t offer much compensation for the risk involved.

Yet he said the rebound in yields may offer some glimmer of hope for companies with pension deficits, as these liabilities look smaller at higher interest rates.

But the analyst said “one man’s meat is another man’s poison”, pointing to the rumours the chancellor is plotting a debt-fuelled infrastructure spending spree in his Autumn Statement, meaning he could be faced with higher financing costs.

He also said there could be a knock-on effect in the mortgage markets, as lenders may find they can’t finance new fixed term mortgages at the same low rates they could just a few weeks ago.

While yields are rising, figures show 10-year gilt prices have fallen by 3.7 per cent in two months, which Mr Khalaf said is pretty negative price action for a ‘safe’ asset.