A trio of opinion polls indicating growing support for a Brexit vote in the 23 June referendum has prompted a slide in stock markets across Europe as investors react to the uncertainty. The interest rate on ten-year Bunds issued by the German government fell below zero for the first time, while the yield on thirty-year UK government debt traded below two per cent for the first time. Almost the entire market for Swiss government bonds also fell below zero. The decline in yields for government debt is reflective of strong demand from investors to seek safe assets. When yield for bonds falls below zero, it means investors are prepared to pay, rather than be paid, to own the debt.
According to PVM Oil Associates analyst Tamas Varga, investors fear that the EU might slip back into recession should the UK leave the EU. Luke Hickmore of Aberdeen Asset Management’s Strategic Bond Fund warn that German Bund yields could fall as low as minus 0.1 per cent, showing how “very, very, very nervous” investors are feeling about the upcoming Brexit vote.
The uncertainty is felt globally as well, with the US ten-year Treasury note yield on course for its lowest closing rate since 2012 at 1.6 per cent. Japan’s benchmark also fell to a historic low of minus 0.185 per cent. Growing anxiety over the global economic outlook is pushing investors into safe haven markets such as Germany despite the vanishing returns they offer. The European Central Bank’s quantitative easing policy is also a significant contributing factor to low bond yields as bond prices rise.
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