Gilt yields reach highest level since Brexit

The yield on benchmark 10-year gilts continues to rise in the UK, reaching 1.2% this morning, the highest they have traded since the June 23 EU referendum, and more than double its low point reached on August 12 (0.52%).

This may be attributable to the rising prospect of an interest rate rise in the US, with markets now pricing in a two in three chance of an increase in December. Yields on 10-year US Treasury bonds have also risen in recent weeks, from 1.6% at the beginning of October to 1.8% now.

The rise comes as international markets are increasingly questioning the UK’s creditworthiness, with the prospect of a ‘hard’ Brexit potentially damaging the UK economy, and tax revenues as a result – and as UK gilt income is paid in pounds and pence, even rising yields are not enough to tempt overseas investors.

Commenting, Laith Khalaf, senior analyst at Hargreaves Lansdown, said anyone holding UK government bonds has seen their capital value fall since the market peaked in August, and by quite some margin for longer dated bonds. However, income-starved investors “can only ignore rising yields for so long”, before they get tempted, he believes. Nevertheless, the growth in yields may offer some glimmer of hope for companies with pension deficits.

“Inflation is the bane of fixed interest securities like gilts, and is coming back into the sharp focus in the UK, as the full ramifications of a weaker pound start to rack up – the high profile spat between Tesco and Unilever last week promises to be the tip of the iceberg for UK consumers when it comes to inflation, and sets an interesting backdrop for this week’s official CPI reading,” he added.

“With bonds yielding so little, they offer precious little protection against anything but very low inflation for a considerable period of time, so it’s natural to see some rebound from extremely thin yield, as inflation worries start to circulate. The prospect of an interest rate rise in the US raises the stakes for bond markets across the globe, and is likely to be partly responsible for spooking the gilt market.”

©2016 funds europe

HAVE YOU READ?

THOUGHT LEADERSHIP

The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
FIND OUT MORE
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…
DOWNLOAD NOW

CLOUD DATA PLATFORMS

Luxembourg is one of the world’s premiere centres for cross-border distribution of investment funds. Read our special regional coverage, coinciding with the annual ALFI European Asset Management Conference.
READ MORE

PRIVATE MARKETS FUND ADMIN REPORT

Private_Markets_Fund_Admin_Report

LATEST PODCAST