To Gauge Concerns About Brexit, Look at British Bonds

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The British pound is the most sensitive barometer of Brexit fears. The currency slumps each time it looks more likely that Britain may crash out of the European Union without a deal. At the same time, however, British government bond prices strengthen because bleak economic prospects mean higher interest rates are less likely. The clearest sign that investors have had enough of the United Kingdom would be when both weaken at the same time.

Britain’s currency and its government bonds, known as gilts, have tended to react to political turmoil by moving in opposite directions. The pound fell nearly 2 percent against the dollar and euro on Thursday after a string of cabinet resignations cast doubt on the future of Prime Minister Theresa May and her draft Brexit deal. But even as the pound suffered its worst day since Oct. 2016, gilts rallied. The yield, which drops when prices rise, on 10-year UK government bonds fell more than 10 basis points, to as low as 1.35 percent.

Even more telling was that British sovereign debt performed better than German and American alternatives. That would not have been the case if investors had become wary of Britain altogether. The gap between the yield on gilts and German bonds narrowed by roughly 10 basis points on Thursday. Meanwhile 10-year United States government bonds yielded as much as 174 basis points more than comparable gilts — the widest difference since 1984.

Like currency traders, bond investors think that the British economy would be damaged by a chaotic no-deal Brexit. But they believe this would force the Bank of England governor Mark J. Carney to defer further interest rate rises, which is typically good for debt prices. That investors can still apply normal bond logic shows that they are not yet panicky.

It would take a full-blown pound crisis for the British central bank to respond by raising rates, ignoring the temporary slump in the pound as it did after the 2016 Brexit referendum. If bond investors believed that was likely, they would be as keen to ditch gilts as currency traders are to sell pounds.

For now, however, Britain’s political crisis has yet to become a financial one.

Swaha Pattanaik is global economics editor of Reuters Breakingviews. For more independent commentary and analysis, visit

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