Gilt yield turns negative for the first time
In the wake of the Brexit vote, the Bank of England governor gave a speech yesterday hinting that the Bank Base Rate could fall further over the summer, from its record low of 0.5%.
Following Mark Carney’s speech, one gilt yield which matures in March 2018 has now turned negative, yielding -0.04%.
While only one gilt yield has been affected so far, Laith Khalaf, senior analyst at Hargreaves Lansdown said this is a landmark for the UK interest rate environment.
Anyone who buys this gilt is paying the UK government for the privilege of lending it money, and this is despite the fact the ratings agencies have downgraded UK government debt in light of the Brexit vote.
The UK now joins Germany, Austria, the Netherlands, Denmark, Switzerland and Japan in the club of countries where gilt yields have turned negative.
The benchmark UK 10 year gilt is now yielding 0.87%, down from 1.37% before the referendum vote, and 4.5% before the financial crisis.
Such low and negative gilt yields suggest a long period of weak economic performance and loose monetary policy to come, said Khalaf.
Khalaf said: “The UK is now officially through the looking glass, as the Brexit vote has pushed gilt yields below zero for the first time. Remarkably markets are now expecting interest rates to lurch downwards, despite already being at record lows.
“The ultra-low interest rate environment paints a depressing picture of our economic prospects, though the gilt market has been so heavily tainted by central bank interference, it’s hard to know how reliable an indicator it is.
“Such low interest rates are great for borrowers, but awful for cash savers, and for banks. Cash savers have already suffered seven years of ultra-low interest rates, and on current expectations it looks like they will comfortably see out a decade without getting a half-decent return on their deposits.”
Stock market rises
As a result of the governor’s speech yesterday, markets are pricing in a cut in Base Rate from 0.5% when the Bank of England’s monetary policy committee meets on 14th July. They are also pricing in a one in four chance of base rate turning negative over the course of the next year.
The stock market rose sharply after the speech, due in part to the fact that that the average dividend yield offered across the stock market is 3.5% – much more attractive than interest rates on cash and bonds, which are now likely to stay lower for longer.
Khalaf said:“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.”