Pile of £1 coins
On the edge: Cost of protecting against swings in the value of the pound versus the euro is at a record high © Dreamstime

The prospect of Britons voting to leave the EU next week fuelled global market upheaval on Tuesday, with investors rushing for safety and sending the UK currency and stocks to their lowest levels in months.

The accelerating shift, which came after a trio of opinion polls showed Leave leading by significant margins, was most marked in government bonds, where a series of records were smashed as cash flowed into the relative security of sovereign debt.

German 10-year Bunds traded with interest rates below zero for the first time after Japan’s benchmark fell to a new low of minus 0.185 per cent. The UK’s 10-year gilt yield recorded a new low, and the 30-year bond dropped below 2 per cent for the first time.

In Switzerland almost the entire market for Swiss government debt had fallen below zero, with 30-year debt offering an annual yield just below zero. The US 10-year Treasury note yield at 1.6 per cent was just above its lowest close since 2012.

Since the interest, or coupon rate, on a bond is fixed at issuance, bond prices rise as yields fall.

Although market volatility has risen in recent weeks as the June 23 election day approaches, Tuesday’s turmoil was the most visible sign to date of the mounting fears gripping pro-EU politicians and business leaders as the public appeared to be seizing on the anti-immigration arguments made by Brexit advocates.

The Financial Times poll of polls indicates 47 per cent of voters back Brexit, and 45 per cent remain.

“People become very visceral,” said Charlie Diebel, head of rates for Aviva Investors. “Uncertainty is the word; nobody knows what the outcome is going to be, and no one knows what the outcome means.”

George Osborne, the UK finance minister who has helped lead the Remain campaign, was expected to seize on the market volatility in a Mansion House speech on Thursday night to reinforce his case that a Brexit vote would have “real world” consequences for the economy and for individual voters.

Mr Osborne will speak alongside Mark Carney, the Bank of England governor, at the annual dinner in the City of London in a final attempt by Britain’s leading economic policymakers to warn that the dangers could plunge the country into recession.

The flight to the safety of bonds was matched by investors pulling out of sterling and UK shares. The pound at one point slipped below $1.41 and closed down 1.1 per cent. The FTSE 100 index finished below 6,000 for the first time since February. The cost to protect against swings in the value of the pound versus the euro is at a record high, breaching levels reached in the financial crisis.

Global shares also suffered. The Euro Stoxx 600, a broad gauge of European shares, dropped 1.9 per cent and has fallen almost 8 per cent so far in June. In Asia, the Japanese Topix, the widest measure of Tokyo’s stock market, weakened 1 per cent and is now down 18 per cent for the year.

Market fears over Brexit come on the heels of growing concerns about the sustainability of economic growth worldwide. US employment figures this month showed the weakest jobs growth since 2010, prompting questions about the state of an American economy that had proved a bright spot as Europe stagnates and Japan teeters near recession.

The collapse in bond yields worldwide has followed an escalation of stimulus policies from the Bank of Japan and the European Central Bank this year. Designed to combat low inflation and tepid economic growth, the measures have helped to push the yield on more than $10tn of sovereign bonds into negative territory.

At the same time simmering anxiety over the outlook for the global economy is driving investors into the safest and most liquid sovereign bond markets despite the vanishing returns they offer.

“This is one of the most peculiar environments for investment I’ve known,” said Andrew Milligan, head of global strategy at UK insurer and investment group Standard Life.

“The Bund’s move below zero is symbolic of a trend we have been living with for more than a year, where the actions of central banks and the weight of money looking for positive returns is leading to unprecedented moves in markets,” he said.

The Federal Reserve raised interest rates for the first time in almost a decade in December, but expectations for a further increase this summer have been dashed. According to interest rate futures markets, the chance of a rate rise at officials’ final meeting of the year in December is now less than 50:50.

Chart: Sterling volatility

Just a month ago, Janet Yellen, the Fed chair, said it would probably be “appropriate” to raise rates in coming months. She is expected to highlight the testing global backdrop at her quarterly press conference on Wednesday when officials are widely expected to keep interest rates unchanged.

“We are seeing the death of quality, positive-yielding assets,” said Ralf Preusser, head of European rates research at Bank of America Merrill Lynch.

“Global growth is still weak and central banks are still buying bonds but the real surprise, and the big driver behind this rally, is the question of how sustainable the US recovery is. Most of the volatility we are seeing is due to investors constantly pricing and repricing interest rate expectations,” he said.

Additional reporting by Richard Blackden

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