Chart: UK benchmark gilt yields

Britain’s revived programme of mass bond-buying accelerated a fall in global bond yields on Wednesday in the latest sign of how central bank policy has intensified a worldwide collapse in borrowing costs this year.

The Bank of England this month announced a new £70bn asset purchase programme designed to address fears of an economic slowdown after Britain voted to leave the EU, joining the European Central Bank and Bank of Japan to become the third major central bank engaged in quantitative easing.

The speed and extent of market reaction to the BoE’s monetary easing programme indicated a change among investors who previously doubted the ability of central banks to further suppress bond yields, said Steven Major, head of fixed income research at HSBC.

“The Bank has made it clear that the next move is lower rates and possibly more QE — if they can find the bonds to buy — which is why this new round of easing is having an influence on everything in markets. It has shifted expectations towards further easing in Europe and away from a rate rise in the US.”

Demand for UK bonds meant yields on two short-dated gilts due in March 2019 and March 2020 briefly traded in negative territory on Wednesday while interest rates across all other maturities fell to fresh lows.

UK’s benchmark 10-year borrowing rate fell to an all-time low of 0.51 per cent on Wednesday as the BoE successfully completed its third day of QE after failing to buy £1.17bn of long-dated paper on Tuesday.

Rates on long-dated 30-year gilts fell to 1.26 per cent for the first time as investors bet that the central bank would be forced to pay sharply higher prices for the debt in order to meet its purchase targets as pension funds and insurance companies prove reluctant to sell.

In global markets, yields on 10-year bonds issued by Spain and Ireland set new record lows of 0.9 per cent and 0.33 per cent respectively. Investor demand for the sale of new 10-year US Treasury notes was strong on Wednesday and the yield for the current benchmark fell 3 basis points to 1.51 per cent. China’s benchmark bond yield fell below 2.7 per cent, the lowest since the global financial crisis.

The moves marked a sharp reversal in sentiment from just six months ago, when many investors had begun to doubt the potency of central bank policies following the BoJ’s adoption of negative interest rates after more than a decade of other measures failed to stimulate inflation.

“This reaction is striking when you consider that we are only on day three of a six-month QE programme in the UK,” said Mike Amey, portfolio manager at Pimco, one of the world’s largest investors, which expects to see further rate interest rate cuts in the UK.

BoE governor Mark Carney has explicitly stated that negative interest rates — which put pressure on bank profits — are not an option but policymakers have left the door open to a further interest rate cut.

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