Gilts yields hit all-time low as recession fears grip the markets

Investors rush into sovereign debt and gold  as share prices  crash again

  • @Benchu_

An investor stampede into safe assets pummelled UK government bond yields down to their lowest level in history yesterday, as fears of global recession and deflation continued to drive financial markets around the world.

The 10-year gilt yield sank to 1.225 per cent as investors piled their money into the perceived haven of UK sovereign debt. Analysts at HSBC forecast that benchmark gilt yields will ultimately go as low as 1 per cent. The 10-year US Treasury bond yield also touched its lowest level in four years and the gold price rose to a nine-month high of $1,235 per ounce.

Meanwhile, the rout in equity markets continued. The FTSE 100 dipped to its lowest point since 2012 in trading, before ending 2.39 per cent down at 5,536.97. 

Bank shares were among the biggest fallers, with an index of UK financial sector equity prices touching a point last reached in the global financial crisis. There were severe stock falls in Europe too, with Germany’s Dax index slumping 2.93 per cent, France’s CAC surrendering 4.05 per cent and Italy’s benchmark index in Milan being hammered by 5.63 per cent.

Banks on the Continent were knocked sideways as investors continued to panic about the health of the sector in an era of negative interest rates from central banks and doubts about their profitability. 

Deutsche Bank lost 6.14 per cent, cancelling out much of the previous day’s 10 per cent rally, while the beleaguered Credit Suisse lost another 8.41 per cent.

The situation was just as severe in the US where the S&P 500 opened sharply lower, taking the index near to its lowest level since 2013. “The key driver is this immense pessimism in asset markets – to hold only the safest assets,” said Steven Englander of Citigroup.

Deflationary fears stalked the markets as the Swedish central bank cut interest rates further into negative territory, in response to its freshly downgraded outlook for domestic inflation. 

Analysts said the Riksbank was attempting trying to get in ahead of the European Central Bank, which is widely expected to loosen monetary policy in the eurozone at its meeting next month.

The oil price fell again yesterday, with a barrel of Brent crude dropping by another 1.98 per cent to $30.23.

Markets have also discounted the possibility of another interest rate rise next month by the US Federal Reserve. Future market prices now suggest that the probability of a rate cut is marginally more likely than an increase – although the overwhelming expectation is for rates to be left on hold by Janet Yellen and the Federal Open Markets Committee.

Swaps markets suggest UK traders do not now expect a rise in rates from the Bank of England until well into 2019.

In the UK stock market, Rio Tinto fuelled the pessimism over commodity stocks as the miner plunged to annual losses of $866m (£598m) and scrapped its promise to maintain or lift its dividend every year.  More punishment was reserved for its rival Glencore, which shed 6.2 per cent.

The last time UK gilt bond yields were close to these record low levels was in early 2015 and during the eurozone crisis in 2012.