U.K. Bond Yields Fall to Record, Catching Some Traders Off Guard
(Bloomberg) — The turn in global market sentiment has caught out investors in U.K. government bonds, spurring a rally that sent the yield on five-year debt to an all-time low.
The rate fell to minus 0.047%, breaking below a previous record in May, with the move beating other havens such as German bunds and U.S. Treasuries. Investors had built larger short bets in gilts than in other sovereign bonds during the recent risk-on mood in markets, forcing some to unwind these positions, said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc.
The flight to havens reflects investor worries that lockdowns may be reimposed and economies re-opened more slowly. New infections set daily records in Texas, Florida and California. Health leaders called on the U.K. to prepare for a possible second wave, while Australia recorded its largest spike in cases since April.
“The move in gilts is the U.S. equities-driven risk off,” said Chatwell. “Every man and his dog seemed to be advocating gilt curve steepeners,” he added, referring to a trade that profits from long-maturity yields rising further.
The yield on five-year bonds was down two basis points at minus 0.04% as of 10:25 a.m. in London. The yield curve flattened as 30-year yields fell four basis points.
Rising Volatility
The previous bets on a steeper yield curve followed the Bank of England’s surprise move last week to slow down the rate of bond purchases, at a time when other central banks are expanding their programs. The decision caused rates on the longest maturity bonds to rise the most.
“The BOE has instilled doubt about its commitment to QE in contrast to the Fed and ECB, to name only two,” Antoine Bouvet, a rates strategist at ING Groep NV. “This means gilts volatility should be more elevated going forward, and we could also see some under-performance.”
With growing worries that a second wave of the pandemic could slow the economic recovery, U.K. bond yields are also being depressed by the lingering specter of negative interest rates.
BOE officials haven’t been able to rule out the unconventional policy, leading money markets to regularly price them in and out for next year. Cutting interest rates below 0% would add fuel to the rally in gilts.
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