Negative interest rate fear as 10-yr gilts fall below 1pc

Stock-Market-Markets-Stockmarket-Finance-Business-700.jpgMarkets are pricing in a 15 per cent chance of negative interest rates in the UK, as 10 year gilt yield have fallen below 1 per cent.

The swaps market is now pricing in a 15 per cent chance of UK interest rates turning negative over the course of the next year, on the back of the EU referendum result.

The market is now also predicting a 50 per cent chance of an interest rate cut in July, a 65 per cent chance of a cut by August, and an 80 per cent chance of a cut by the end of the year.

Meanwhile the 10 year gilt yield fell below 1 per cent for the first time this morning, to 0.933 per cent, before recovering slightly, as investors sought the safety of government bonds in the face of Brexit uncertainty.

Annuity rates are already starting to fall. Just Retirement and Retirement Advantage have both announced annuity rate cuts this morning, more are likely to follow. Just Retirement’s rates are down by around 2 per cent.

Hargreaves Lansdown senior analyst Laith Khalaf says: “The Brexit vote has substantially moved the dial on interest rate expectations, with markets now pricing in a significant chance of rates going negative in the UK.

“This is good news for borrowers, who can now expect lower mortgage rates for even longer, but cash savers will be wondering just how many years they have to wait to get a decent return on their deposits.

“The Bank of England may soon find itself between a rock and a hard place, if the economy and inflation start pointing in different policy directions. That’s because although the Brexit vote has increased economic uncertainty, it has also taken a toll on Sterling, which is likely to feed through into inflation because it makes imports that much more expensive.  This raises the uncomfortable prospect for the central bank of cutting interest rates while inflation is rising, something it has proved it is willing to do in the past in order to boost the economy.

“The flight to safety and the shift in interest rate expectations pushed yields on the 10 year gilt below 1 per cent for the first time this morning. This represents a vote of low confidence in the UK economy, though it does at least signal the bond market still expects the UK government to pay its debts, despite threats of credit downgrades from the ratings agencies.”

Hargreaves Lansdown head of retirement policy Tom McPhail says: “Gilt yields and annuity rates have been dropping steadily over the past year. The events of the past couple of days have given new momentum to that trend. For any investor planning to buy an annuity in the immediate future, it may make sense to do so sooner rather than later.”