The Brexit fallout rolls on with the rush towards fixed-income safe havens leading government bond yields to fall to record lows. With 10-year yields in Canada now below one per cent and 30-year yields never lower, the descent here has mimicked most Western nations since the UK referendum on June 23.
Scott Colbourne is a portfolio manager with Sprott Asset Management and specializes in fixed income and the currency markets. While not discounting the effect of the vote in the UK, the current bond market is part of a much longer-term trend in his view.
“When you look at the break-even inflation rate, the markets’ measure of inflation, the Fed’s five-year forward – it peaked in the beginning of May and by the time Brexit came around it had already moved down considerably,” he says. “There was clearly something happening apart from Brexit.”
The turmoil in the markets that greeted the UK’s decision to leave the EU then created a financial conflagration that spread globally.
“There was speculation of whether the ECB would focus on narrow capital constraints in terms of purchasing securities, and that would drive bond yields lower,” says Colbourne. “After Brexit we got a sense that the Bank of England would move for more accommodation. All of that was a final catalyst for yields going lower, but clearly there was an adjustment happening beforehand.”
The aftermath of Brexit has created plenty of uncertainty, which of course is anathema to the markets. Is the current climate one that investors will have to get used to in the long run, however? History, as always, offers a guide.
“Yields are going to be lower for longer and the question now is – can they ever get out of it? I remember 10 years ago people were talking about bond yields going up and I said there was a possibility we could go lower, just look at Japan! People said that was an anomaly, but it seems we have been following that rather than avoiding. So maybe it stays low here like it has there for a long period of time.”
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