U.K. Bonds Hold World-Beating Gains as Global Easing Escalates

  • Money markets show about 40% odds of BOE rate cut in 2016
  • Gilts supported as `Brexit' debate clouds economic outlook

U.K. government bonds held gains after the European Central Bank cut all its interest rates and expanded its monthly bond purchases by a third, in a major effort to stimulate the economy of Britain’s biggest trading partner.

Gilts have delivered the biggest returns in the developed world this year, as investors pushed back the timing of a potential increase in the Bank of England’s benchmark rate, which has been at a record-low 0.5 percent since March 2009. Forward contracts based on the sterling overnight index average, or Sonia, show the chances of a 25 basis-point reduction by December about 40 percent.

In addition to signs the domestic economy is slowing down, the path toward normalizing U.K. monetary policy has also been complicated by external events from the emerging-market slowdown sparked by China to disinflation in the euro bloc. The European Central Bank on Thursday cut several of its interest rates, including its deposit rate by 10 basis points, or 0.1 percentage point, to minus 0.4 percent.

New Zealand’s central bank unexpectedly cut its interest rates to a fresh record in Wellington and signaled further easing may be needed, saying it’s concerned by a slump in inflation expectations. The Bank of Japan introduced negative interest rates in January.

Demand for gilts has also been supported as investors assess the potential for British voters to back withdrawal from the European Union in a June 23 referendum, an event that BOE Mark Carney has said would hurt the City of London and heighten risks to financial stability. Gilts would stand to benefit from any economic woes that follow, according to some investors including JPMorgan Asset Management.

‘More Attractive’

“The more you have negative yields across much of Europe, the more attractive on a relative basis gilts and Treasury yields look because they are simply that much higher,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “Whatever anyone says about ‘Brexit,’ there’s no one saying that the risk of a U.K. default would rise enormously as a result. Gilts are seen as relatively attractive as long as we have a falling trend” elsewhere, he said.

The benchmark 10-year gilt yield was little changed at 1.47 percent as of 2:45 p.m. London time. The price of the 2 percent security due in September 2025 was 104.64 percent of face value. The yield reached 1.226 percent on Feb. 11, the lowest since Bloomberg began collecting the data in 1989.

The pound weakened 0.3 percent to 77.61 pence to the euro, and it was little changed at $1.4222.

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