Bond Bulls Keep Buying at Record-Low Yields in Post-Brexit World

  • Spanish 10-year bond yield drops to lowest on record
  • Benchmark German yields decline for a sixth consecutive week

With investors focused on how central banks will respond to the economic risks posed by Britain’s decision to leave the European Union, bond bulls say this is no time to abandon government debt securities, even with yields at record lows.

Global sovereign bonds, which have handed investors almost 12 percent in 2016, were underpinned this week as the European Central Bank was reported to be ready to tweak its asset-purchase program to increase the pool of eligible bonds and after Bank of England Governor Mark Carney signaled that U.K. interest rates may drop in coming months.

There may be more to come with investors and banks, including Edinburgh-based money manager Kames Capital Plc and Societe Generale SA, France’s second-largest lender, expecting the ECB to extend its bond buying beyond its planned end-date of March 2017.

“In the face of the current Brexit haze, we think bond investors should keep calm and continue buying government bonds,” said Seamus Mac Gorain, London-based global fixed-income portfolio manager at JPMorgan Asset Management, which oversees about $1.7 trillion. The prospects of more easing by central banks globally “suggests the direction of government bond yields is heading down,” he said in an emailed note on Friday.

Yields Slide

Benchmark German 10-year bund yields fell eight basis points, or 0.08 percentage point, this week to minus 0.13 percent as of the 5 p.m. London close Friday. The 0.5 percent security due in February 2026 rose 0.78, or 7.80 euros per 1,000-euro ($1,115) face amount, to 106.06. The yield declined for a sixth week, having touched a record-low of minus 0.17 percent on June 24 after the confirmation of the U.K. Brexit vote.

Societe Generale forecasts Germany’s 10-year yield will slide to minus 0.25 percent this year, Ciaran O’Hagan, Paris-based head of European rates strategy, wrote in a client note Friday.

This week’s rally extended Germany’s negative-yield universe as far out as bonds maturing in 15 years, with more than half of the nation’s 1.1 trillion euros of sovereign debt now yielding less than the ECB’s deposit rate of minus 0.4 percent. That makes them ineligible for purchase under the central bank’s quantitative-easing program and increases the pressure on the ECB to find alternative sources.

Spanish Rally

That maybe a boon for Spain’s government bonds, which had their best week in almost four years after Prime Minister Mariano Rajoy defied opinion polls to consolidate his position in the nation’s June 26 general election.

Spanish 10-year bond yields dropped 48 basis points this week to 1.15 percent, the steepest decline since September 2012. The yield reached 1.047 percent on Friday, the lowest since Bloomberg started collecting the data in 1993. The yield difference, or spread, versus similar-maturity German bunds narrowed to a 2016 low of 112 basis points, having been as wide as 194 basis points on June 24.

Futures show a more than 50 percent chance of a rate cut by the ECB’s September meeting, compared with 26 percent the day before Britain’s June 23 referendum.

In more signs of the demand for government debt this week, the yields on all of Switzerland’s bonds were below zero, while those on some non-benchmark U.K. gilts also turned negative. There are now $9.99 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index that have negative yields, while the average yield on bonds in the index reached a record-low 0.45 percent.

“Nothing forever maybe a little exaggeration, but we have moved again into a further set of central-bank actions to offset the headwinds with stimulus,” Stephen Jones, chief investment officer at Kames Capital, which oversees about $77 billion, said in an interview this week.

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