FTSE hits 10-month high, as gilt yields go negative

Stockmarket-Performance-Business-700x450The FTSE 100 rallied yesterday following Bank of England governor Mark Carney’s speech pledging more monetary stimulus to the economy.

The blue-chip index rose to end the day at 6524.30, a 144 point rise. The level marks the highest since August last year.

In the speech yesterday, his second since the UK’s vote to Brexit, Carney signalled that the bank will cut interest rates or restart QE this summer, following the UK’s decision to Brexit.

However, at the same time the first gilt went negative. A gilt maturing in March 2018 traded at -0.04 per cent.

The shift came as markets now expect interest rates to fall to 0 per cent, with negative interest rates not ruled out.

Mitul Patel, head of interest rates at Henderson, says: “The gilt market has responded strongly to Carney’s speech, and as a result we now have the first negative yielding gilt in the UK.

“The market now expects interest rates to fall to close to 0 per cent, and whilst Carney has previously stated a dislike of negative interest rates, nothing can be taken off the table.

“Carney also intimated that the Bank of England will look at other tools at their disposal. This almost certainly includes Quantitative Easing, via the gilt markets and potentially via the corporate bond markets.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “The UK is now officially through the looking glass, as the Brexit vote has pushed gilt yields below zero for the first time. Remarkably markets are now expecting interest rates to lurch downwards, despite already being at record lows.

“The ultra-low interest rate environment paints a depressing picture of our economic prospects, though the gilt market has been so heavily tainted by central bank interference, it’s hard to know how reliable an indicator it is.”

Howard Archer, chief UK and European economist at IHS Global Insight, says there is “little doubt” that the BoE will cut interest rates from 0.50 per cent to 0.25 per cent.

“While there is a possibility that the Bank of England could eventually take interest rates down to 0 per cent, we are far from convinced that they would do this and we doubt very much the Bank of England would take interest rates into negative territory.”

Archer adds that he expects the government to extend the Funding for Lending Scheme and may return to QE, with stock purchases of £375bn.