U.K. Bonds Surge as Brexit Prompts Bets on BOE Interest-Rate Cut

  • Benchmark 10-year gilt yields slide to lowest on record
  • Two-year gilt yields slide to lowest level since April 2013

U.K. government bonds surged as the nation voted to leave the European Union amid speculation the Bank of England will maintain an easy monetary policy to ward off the risk of recession after the departure.

Benchmark 10-year gilt yields dropped to an all-time low, while those on two-year securities plunged to the lowest since April 2013. The campaign to leave the world’s biggest trading bloc gained 52 percent of the vote, versus 48 percent for “Remain,” after all the voting stations declared results Friday morning in London. U.K. Prime Minister David Cameron resigned, saying he’d serve another three months.

The pound plunged by the most on record against the dollar, and reached its lowest level since 1985. The chances of the BOE cutting interest rates by next month have climbed to about 43 percent from 10 percent at the start of June, according to data compiled by Bloomberg.

“The front end of gilt curve will be the target because the Bank of England is likely to be more dovish after this event,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “Ten-year yields could be slightly more tricky. Domestic investors would sell stocks and buy gilts as a safe haven, but some international investors may be selling gilts.”

Yields Tumble

Benchmark 10-year gilt yields dropped 32 basis points, or 0.32 percentage point, to 1.05 percent as of 12:42 p.m. London time, after touching 1.014 percent. The 2 percent bond due in September 2025 climbed 2.885, or 28.85 pounds per 1,000-pound ($1,376) face amount, to 108.285. The yield on the nation’s two-year securities tumbled as much as 33 basis points to 0.2 percent.

While high-street betting patterns may have suggested the odds of a “Leave” result were only about 25 percent on Wednesday, recent polls suggested national opinion was split almost down the middle.

The pound whipsawed throughout the four-month campaign before the vote and acted as the main barometer of sentiment, while gilts have benefited amid speculation that they would act as a haven from any market turmoil resulting from a Brexit.

The securities were also supported by wagers that a worsening U.K. economy would prompt the BOE to keep rates at record lows, and even extend stimulus depending on the severity of the slowdown. That’s made them the best-performing major sovereign bonds this year.

Gilts earned 6.2 percent this year through Thursday, according to Bloomberg World Bond Indexes. That compares with a 3.8 percent return on Treasuries and 4.6 percent for German sovereign securities.

Before it's here, it's on the Bloomberg Terminal.