U.K. Bonds Beat Treasuries During Month Before Britain’s EU Vote

  • Gilts return 1.7% in past month as U.S. securities earn 1.2%
  • Sovereign notes head for best first-half return in 21 years

U.K. government bonds are beating Treasuries and other major sovereign debt markets over the past month as investors sought their relative safety in case Britain votes to leave the European Union.

Gilts returned 1.7 percent in the period, the best performance of 26 markets tracked by Bloomberg. Greece and Portugal were the only debt markets to show a loss. Treasuries earned 1.2 percent in the month through Wednesday, though they slid Thursday along with U.K. bonds as Britons headed to vote.

The threat of the U.K. leaving the EU in a referendum has driven a worldwide rush to the relative safety of fixed-income securities, driving a return of 4.9 percent for the Bank of America Corp.’s Global Government Index this year. The rally puts global sovereign bonds on their way to the best first-half performance since 1995.

Federal Reserve Chair Janet Yellen helped support the market by saying this week the central bank is watching for whether the U.S. economy will show signs of improvement.

“Leading into the referendum, we’ve been generally neutral in positioning on gilts,” said Chris Chapman, a trader at Manulife Asset Management in London. “Once the uncertainty of the referendum is past, assuming ‘Remain’ carries the day as it seems to be trending, it will remove that overhang and allow going back to looking at gilts from a fundamental or relative value. A ‘Leave’ result will keep the level of uncertainty higher.”

Benchmark U.S. 10-year note yields rose six basis points, or 0.06 percentage point, to 1.74 percent as of 6:31 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 fell 17/32, or $5.31 per $1,000 face amount, to 98 30/32.

Record Low

The yield on 10-year gilts climbed eight basis points to 1.39 percent, moving further from the record low of 1.068 percent set last week.

A U.K. decision to stay in the EU will curb the flight to quality and send global yields higher, said Kim Youngsung, the head of overseas investment in Seoul at South Korea’s Government Employees Pension Service, which has $13 billion in assets. 

A vote to leave would extend the worldwide debt rally and send 10-year Treasury yields down to their record low of about 1.38 percent within a few days, he said. 

“That will hurt the European economy and the global economy,” Kim said. “Everybody will rush to buy global bonds.”

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