Negative rates addiction, confusion and absurdities series: UK rates at 320 year low

Yes that's right. You are reading it right. 320 year low. Mind blowing, huh?

We at FxWirePro, had about similar reaction, when last week on Friday telegraph reported the numbers. UK yields have reached their lowest point not in 320 but at least in 320 years since the record began in 17th century. Telegraph argued that it's due to a run for safety by investors providing evidence that while yields are dropping in traditional safe haven bond markets such as Treasuries and bunds, yields are moving higher in Portuguese and Spanish bond markets.

It also points out that the rally is likely to be due to fading rate hike bets from Bank of England (BOE). Lower or no inflation likely to keep BOE in check and it would refrain from hiking rates any time soon. Some might even argue that BOE will lower rates before it can hike and link that to Gilts rise.

However, does it it really make sense lending to UK government for 10 years at just 1.22% or lend Switzerland and Japan for 10 year and lose money or lend it to German government at about 0.25% for 10 years.

It doesn't unless one is expecting the one or some of the following -

• Deflation to get worse over the coming years, prompting central bankers to buy more bonds and push yields lower.
• Investors aren't looking for return on investments but return of investments.
• Outlook for other asset class isn't bright, so lending to government at such rates wouldn't be much bigger opportunity cost.
• Negative rates to dive lower so investing in bonds with positive return make sense.

We sincerely hope, these are the factors contributing to the rally, however there could be something else at play.

It is possible, era of abundant cash is coming to end, at least in expectations. In such a case QE would not work as intended. Greater the supply of today, higher would be the shortage of tomorrow.

We would be looking into this concept into greater detail in our following posts under the series.