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Europe, Forex

UK bond yields hit record lows on trade war and Brexit fears

(Adds detail, comment)

By David Milliken

LONDON, Aug 5 (Reuters) – British 10-year government bond yields fell to a record low below 0.5% on Monday, benefiting from a global rally in fixed income assets as investors sought a shield from increased U.S.-China trade tensions and any spillover from Brexit.

China allowed its yuan currency to weaken to more than 7 to the dollar for the first time in more than a decade, in a sign Beijing might tolerate more currency weakness that could further inflame a trade conflict with the United States.

“The signal from the global economy is not a good one,” ADM Investor Services strategist Marc Ostwald said.

The 10-year gilt yields sank as low as 0.491% at 0906 GMT, after it broke through a previous all-time low of 0.503% that had held since August 2016, when the Bank of England launched its last round of bond purchases.

For British domestic investors, government bonds remain a safer place than shares, while for some overseas investors the yield is more attractive than the sub-zero returns available elsewhere, despite the risk of a further fall in sterling.

For Britain’s government, lower yields reduce the cost of funding new borrowing.

“People are pile-driving into safety, and wherever you look you get this phenomenon of ‘how far below the respective base rate can 10-year yields go?’,” Ostwald said.

At 1126 GMT, the 10-year yield was 4 basis points down on the day at 0.51%.

Interest rate futures price in a more than 90% chance that the BoE will follow other central banks and cut its main interest rate to 0.5% from 0.75% before Governor Mark Carney steps down at the end of January.

The BoE says this primarily reflects potentially misplaced market expectations of substantial easing if Britain leaves the European Union without a deal on Oct. 31 – something Prime Minister Boris Johnson’s government is actively preparing for.

Ostwald said fears of a no-deal Brexit had strengthened after Britain’s Brexit minister, Stephen Barclay, said on Sunday the EU must renegotiate the exit deal after repeated rejections by Britain’s parliament.

The EU again said on Monday it would not reopen the main part of the agreement.

Other European bonds also rallied strongly on Monday, with Dutch 30-year yields falling below zero for the first time.

British 30-year yields matched an all-time low of 1.186% set in August 2016, while the 20-year yield broke past its August 2016 record to set a new all-time low of 1.028%.

“For domestic investors, government bonds – relative to UK equities or anything else – are a safe haven,” Ostwald said. (Reporting by David Milliken Editing by Michael Holden and Frances Kerry)

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