U.K. Bonds Celebrate as Spread to U.S. Widens to 15-Year High

  • Gilts return 12% in first half, more than double Treasury gain
  • El-Erian says bond yields point to slower economic growth

U.K. bonds are closing the first half with a 12 percent gain, more than double what Treasuries have returned, on concern Britain’s decision to leave the European Union will drive the nation into recession.

The extra yield 10-year Treasuries offer over similar-maturity gilts is 55 basis points, after widening to 57 basis points Wednesday, the biggest difference since December 2000.

Yields plunged globally this year on speculation a Brexit vote would curb the economic expansion and make it tougher for the U.S., Europe and Japan to raise their inflation rates. Government bond yields point to slower growth and more dovish central banks, Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg View columnist, wrote on Twitter Wednesday.

“The flight to quality will continue for the rest of the year,” said Lee Junhyeok, a bond investor at Mirae Asset Securities Co. in Seoul, which oversees $7.8 billion. “The global economy will weaken further. I’m quite bullish” on bonds, he said.

Treasury 10-year note yields were little changed at 1.51 percent as of 7:44 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 101 3/32.

Ten-year gilts yielded 0.96 percent, after touching a record low of 0.931 percent earlier this week, amid speculation the nation’s separation from the EU will push the Bank of England to cut interest rates. Futures contracts implied a more than 50 percent chance of a BOE cut in August, rising from 15 percent a week ago.

For more on U.K. gilts and the outlook for the Bank of England, click here.

Traders abandoned bets for the Federal Reserve to raise interest rates. The odds of an increase in 2016 are 12 percent and less than 50 percent for 2017, futures contracts indicate.

A U.S. inflation gauge watched by the Fed rose 0.9 percent in May from the year before, the government reported Wednesday. It has been below the central bank’s 2 percent target for four years. Thursday’s data will include initial jobless claims and Chicago-area business activity.

Morgan Stanley economists said this week the chance of a global recession starting in the next 12 months is 40 percent, raising the figure from 30 percent. The company is one of the 23 primary dealers that trade directly with the Fed.

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