Gilts’ Rally Holds Danger for Deutsche Bank Recalling 2015 Slump

  • Ten-year gilt yield dropped to all-time low this week
  • German bund yield surged in April 2015 from then-record low

The world-beating rally by U.K. government bonds since the Bank of England resumed its asset-purchase program this month could be setting them on course a reversal similar to that which befell euro-area sovereign bonds last year, according to Deutsche Bank AG.

Gilts have climbed since the BOE cut interest rates and boosted quantitative easing earlier this month, with benchmark 10-year yields dropping to a record low this week. Still, Deutsche Bank says the rally may be vulnerable to a reversal when the government’s spending plans become clearer. U.K. Chancellor of the Exchequer Philip Hammond has hinted he’ll implement some fiscal stimulus later this year to complement the BOE’s monetary easing, which may boost government debt sales.

After the European Central Bank started its bond purchases in March 2015, the yield on German 10-year bunds, the euro region’s benchmark sovereign securities, slid from as much as 0.4 percent on the day central-bank buying began to a then record-low 0.049 percent by mid-April. It took less than two months for it to jump more than 1 percentage point as investors balked at razor-thin yields, sparking a global reversal.

“If you look at what happened in Europe, you had an overreaction which lasted for a few weeks, and then adjusted when you had a supply response,” said Francis Yared, a rates strategist at Deutsche Bank in London. “The question is, when do we get enough evidence of that? That will depend on when we hear something more specific from the government on the fiscal side. It’s probably more likely to be a September event.”

Benchmark 10-year gilt yields rose four basis points, or 0.04 percentage point, to 0.59 percent as of 2:29 p.m. London time. The 2 percent bond due in September 2025 fell 0.42, or 4.20 pounds per 1,000-pound face amount, to 112.37. The yield dropped to a record 0.501 percent on Aug. 15, compared with an intraday high of 0.811 percent on Aug. 4.

Gilts earned bondholders 3.8 percent in the past month through Thursday, according to Bloomberg World Bond Indexes. The average return on euro-area sovereign debt was 0.9 percent, while German securities gained 0.4 percent.

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