Brexit likely to place government bond yields further under cosh

If Britain quits the European Union next week, the result will likely be intensified downward pressure on bond yields already under the cosh amid a global flight to safe-haven assets.

"It would be wrong, in our view, to believe that we would see a sharp rise in global yields if we do not see a Brexit next week," said Danske Bank in a note. The global 'hunt for yield' will not disappear," it added.

At 14:44 BST, UK 10-year gilt yields were down 1 basis point (bps) to 1.11%. Yields on 10-year US 10-year treasuries were lower 18 bps to 1.54% and 10-year German bunds were down 1 bps to -0.03%. Yields on 10-year Japanese bonds were flat at -0.21%.

"If we do see a Brexit, the global downward pressure on yields is likely to intensify," Danske Bank added.

Global stock markets and currencies are caught in volatile times as investors flock to the safety of gold, bonds and defensive currencies such as the Swiss franc and yen.

The spectre of a Brexit -- where UK votes on whether or not to quit the EU on 23 June -- along with concerns about global and country-specific economic growth are weighing.

Capital Economics' John Higgins noted bond yields fell this week as various opinion polls suggested UK would vote to leave the EU, and they were down again today after Bank of England, US Federal Reserve, Bank of Japan (BoJ) and Swiss National Bank all stayed pat on rates.

"We wouldn’t be surprised if the yields of such 'safe haven' assets declined even further in the event of a vote for a Brexit," contended Higgins.

"Nonetheless, in most cases we expect their yields to end the year higher than they are now, especially in the case of 10-year US Treasuries," he said.

Against this backcloth, the European Central Bank is buying €80bn of bonds a month, and at least Danske Bank expected that to be prolonged for a further six mnths.

Danske Bank added that BoJ appeared set to continue buying bonds at a record pace in 2016 and 2017, and that bond yields could move even lower if that central bank cut rates to -0.3% as it expected in July.

Meantime, Deutsche Bank added that the Fed appeared to help US Treasury yields stay low in the near-term as "their (latest) meeting concluded in dovish fashion with July increasingly looking like it's off the table (for a US rate hike)."

Capital Economics' Higgins added that a Brexit vote by the Uk would delay rather than stop tighter US monetary policy being introduced.

"Irrespective of the outcome of next Thursday's vote in the UK, we think that the Federal Open Market Committee (FOMC) will raise the federal funds rate in 2017 by far more than investors are currently anticipating in order to contain inflation," Higgins said.

"What’s more, our forecast is that Treasury yields will begin to rise sharply later this year, as growing signs of price pressure in the US economy prompt investors to reassess how much the FOMC will tighten the screws."