From Reuters' Breakingviews, Nov. 16
Sterling
is the most sensitive barometer of Brexit fears. The pound slumps each
time it looks more likely that Britain may crash out of the European
Union without a deal. At the same time, however, UK government bond
prices strengthen because bleaker economic prospects mean higher
interest rates are less likely. The clearest sign that investors have
had enough of the United Kingdom would be when both weaken at the same
time.
The UK currency and government bonds have tended to react to
political turmoil by moving in opposite directions. Sterling fell nearly
2 percent against the dollar and euro on Thursday after a string of
cabinet resignations cast doubt on the future of Prime Minister Theresa
May and her Brexit divorce deal. Yet even as the pound suffered its
worst day since October 2016, gilts rallied. The yield on 10-year UK
government bonds fell more than 10 basis points, to as low as 1.35
percent.
Even more telling was that UK sovereign debt performed better than
German and U.S. alternatives. That would not have been the case if
investors had become wary of Britain altogether. The gap between the
yield on gilts and German bunds narrowed by roughly 10 basis points on
Thursday. Meanwhile 10-year U.S. government bonds yielded as much as 174
basis points more than comparable gilts – the widest difference since
1984....MORE
