10-year Gilt Yield: A Vanishing Act

High political drama in Westminster dominates headlines. Yesterday we saw the new prime minister suffer his first commons defeat. The motion to rule out a ‘No Deal’ Brexit progresses with a 27 majority. A general election looms.

Away from the limelight, however, a less-noticed – but equally important – market trend is the stunning drop in UK gilt yields. Last I checked, 10-year yield in the UK trades at 0.38%. Intraday lows during Tuesday’s political drama was 0.34%!

Look at 10-year Gilt yield’s daily chart below. From the 52-week highs near 1.70%, the rate has collapsed into new long-term – and possibly record – lows. While you may point out that bond yields are dropping everywhere in the developed world, but the rate at which UK long-maturity gilt yields are falling is still phenomenal. The yield practically halved in just eight weeks (July-August).

Source: FT

The question is: Will UK 10-year plunge to zero? At the current rate yields are falling, I think ‘yes’. In markets, what was previously ‘unthinkable’ can become reality (read: Lehman) when conditions allowed. As Brexit becomes messier, investors have low confidence it will be resolved soon. The drop in Pound Sterling is a reflection of this thought. The drop in gilt yield is another.

Look at some of the gilt-based exchanged-traded funds. iShares Core Gilts ETF (IGLT) is accelerating the medium-term trend all the way into new highs (see below). This trend remains in full motion.

SPDR 15-year+ Gilt ETF (GLTL, featured chart) also soared to record highs. The current bull trend comes after a lengthy sideways consolidation at 60-66. Momentum favours the bulls.

Overall, gilts are now a significant safe-haven asset for investors. Stay long this asset while the Brexit saga is still rolling on. Trailing stops are recommended to protect some profits.

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