04/01/2013 17:02
The UK’s benchmark bond yield briefly exceeded France’s comparable debt yield for the first time in more than a year and a half on Friday.
The yield of the UK’s benchmark 10-year gilt rose 5 basis points to 2.118 per cent on Friday morning in London, marginally higher than the 2.116 per cent yield on 10-year French bonds at the time.
It is the first time since April 11, 2011 that the UK’s benchmark borrowing costs have been higher than those of France. By midday in London the 10-year UK gilt yield had climbed 5bp to 2.12 per cent, and the 10-year French bond yield had edged up 3bp to 2.14 per cent.
The UK bond market has underperformed other major markets for some time now, after the Bank of England halted its bond-buying programme, so-called quantitative easing. Over the past six months the UK’s 10-year yield has climbed almost 48bp, more than all other highly rated bond markets.
“Without QE you’d, as a minimum, expect gilts to underperform other core markets, and that’s exactly what has happened,” said Mike Amey, a portfolio manager at Pimco. “Gilts have been a bad trade recently.”
At the same time, the yields of Europe’s core bond markets have fallen markedly as euro investors seek bonds that offer higher returns than German Bunds, but still offer relative safety – such as France. Paris’s 10-year borrowing costs have dipped 32bp over the past six months.
France has benefited, in particular, from bond purchases by overseas central banks, particularly the Swiss National Bank and Asian central banks, traders say.
These institutions control sums so large they would swamp the better-regarded eurozone bond markets, such as the Netherlands and Finland. In contrast, France’s bond market is one of the largest and most liquid in the world.
France has lost its top triple A rating from Standard & Poor’s and Moody’s, two of the three largest rating agencies, while the UK remains rated triple-A by all three. However, S&P’s, Moody’s and Fitch all have negative outlooks on the UK, and investors widely expect a downgrade in 2013.
Nonetheless, many investors and analysts are sceptical that France’s bond yields can stay this subdued, given the country’s weak economic and fiscal fundamentals.
Although the UK’s fundamentals are arguably just as weak as France’s, it benefits from controlling its own monetary policy, while France is locked into the euro. If UK bond yields continue to edge up, investors expect the Bank of England to resume its bond-buying programme.
“My gut feeling is that another 50bp move in gilt yields would probably be enough for the bank to restart QE.” Mr Amey said.
The yield of the UK’s benchmark 10-year gilt rose 5 basis points to 2.118 per cent on Friday morning in London, marginally higher than the 2.116 per cent yield on 10-year French bonds at the time.
It is the first time since April 11, 2011 that the UK’s benchmark borrowing costs have been higher than those of France. By midday in London the 10-year UK gilt yield had climbed 5bp to 2.12 per cent, and the 10-year French bond yield had edged up 3bp to 2.14 per cent.
The UK bond market has underperformed other major markets for some time now, after the Bank of England halted its bond-buying programme, so-called quantitative easing. Over the past six months the UK’s 10-year yield has climbed almost 48bp, more than all other highly rated bond markets.
“Without QE you’d, as a minimum, expect gilts to underperform other core markets, and that’s exactly what has happened,” said Mike Amey, a portfolio manager at Pimco. “Gilts have been a bad trade recently.”
At the same time, the yields of Europe’s core bond markets have fallen markedly as euro investors seek bonds that offer higher returns than German Bunds, but still offer relative safety – such as France. Paris’s 10-year borrowing costs have dipped 32bp over the past six months.
France has benefited, in particular, from bond purchases by overseas central banks, particularly the Swiss National Bank and Asian central banks, traders say.
These institutions control sums so large they would swamp the better-regarded eurozone bond markets, such as the Netherlands and Finland. In contrast, France’s bond market is one of the largest and most liquid in the world.
France has lost its top triple A rating from Standard & Poor’s and Moody’s, two of the three largest rating agencies, while the UK remains rated triple-A by all three. However, S&P’s, Moody’s and Fitch all have negative outlooks on the UK, and investors widely expect a downgrade in 2013.
Nonetheless, many investors and analysts are sceptical that France’s bond yields can stay this subdued, given the country’s weak economic and fiscal fundamentals.
Although the UK’s fundamentals are arguably just as weak as France’s, it benefits from controlling its own monetary policy, while France is locked into the euro. If UK bond yields continue to edge up, investors expect the Bank of England to resume its bond-buying programme.
“My gut feeling is that another 50bp move in gilt yields would probably be enough for the bank to restart QE.” Mr Amey said.
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