Gilt yields rise above 1% for the first time since Brexit
The yield (the interest rate received by holders of government bonds) on the benchmark 10-year gilt rose from 0.73% last Monday to just over 1%.
Gilt yields rise when the price of gilts drop as a result of decreased demand from private investors.
While 1% is still an exceptionally low yield by historical standards, it is almost double the lowest point, 0.52%, reached on 12 August 2016.
The yield on the 10-year gilt has risen sharply in the last week in tandem with sterling’s decline, with the pound falling from $1.30 to $1.24.
Laith Khalaf, senior analyst, Hargreaves Lansdown, said this could be down to overseas investors dumping sterling assets, including gilts, as fears over a hard Brexit appear to be gathering momentum.
“Gilt yields have ticked up sharply over the last week, and given what’s happened on the currency markets it looks like a fair assumption that overseas investors are dumping UK government bonds,” he said.
“Of course bond yields are still exceptionally low, but anyone holding government bonds has seen their capital value fall since the market peaked in August, and by quite some margin for longer dated bonds. There may also be knock on effects 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.”
Khalaf said the rebound in gilt yields may offer “some glimmer of hope” for companies with pension deficits, as these liabilities look smaller at higher interest rates, and finance directors worrying about their next scheme valuation might well be urging yields up further.
However, he said “one man’s meat is another man’s poison” as the Chancellor, Philip Hammond, who is rumoured to be plotting a debt-fuelled infrastructure spending spree in his Autumn Statement, potentially now faces higher financing costs.