United Kingdom Yields

The degree of difficulty for the UK is unparalleled: a global Pandemic and the Brexit transition. The Pandemic hides some of the decline in foreign demand the exit from the European Union would have delivered. The inflation bonds tell the story succinctly: negative yields that exceed the average inflation rate of the last 40 years. The implication is stark: zero inflation and little growth for the foreseeable future.

  • The short-end of the curve should be negative when the 30-year yields are below 1%. One of them is incorrect and it's probably the short-end given the inflation bond yields are negative.

  • Yield curve valuation suggests long 30-year and short 2-year on a relative basis and highlights the prospect of negative nominal yields..

  • The negative yields on inflation bonds reflect their embedded protection against deflation and offer little benefit against inflation.

 

Disclaimer: All positions are suggestive of relative value and not intended as a recommendation or investment advice. Consult an investment advisor before implementing any investment strategy.

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