Brexit roller coaster; Negative yielding bonds fell USD 4tn from peak


GBP susceptible to profit taking. Negatice yielding bonds have fallen by USD 4tn.
Philip Wee, Eugene Leow18 Oct 2019
    Photo credit: AFP Photo


    FX: GBP’s Brexit rollercoaster and profit-taking risks

    The Brexit deal that Prime Minister Boris Johnson struck with the EU is not secure yet. Considered worse than Mrs Theresa May’s withdrawal agreement, Mr Johnson’s “great new deal” was not supported by its crucial ally, the Democratic Unionist Party (DUP) and rejected by the opposition parties. Not surprisingly, the British pound was quick to give back most of the sharp gains from the deal’s announcement but has bounced again after EU leaders ratified the deal.

    Without a Commons vote to support the deal or the UK leaving the EU without one, Mr Johnson will be required, under the Benn Act, to request by October 19, Brussels for an extension of Article 50 to January 31, 2020. Unfortunately, there is no guarantee that the EU would grant a Brexit delay. Now that a deal has been brokered, EU President Jean-Claude Juncker has ruled out a further delay. The authority, however, lies with the EU 27 leaders to grant the extension. The EU had previously signalled preference for a longer extension to June 2020 for the UK to hold new elections or a second Brexit referendum.

    Hence, the risk of a no-deal Brexit on October 31 still cannot be totally ruled out. After its surge from 1.22 to 1.30 in six trading sessions, GBPUSD is vulnerable to profit-taking risks before tomorrow’s crucial Commons vote.

    Rates:  Outstanding negative-yielding bonds fall USD 4tn from peak         

    The amount of negative yielding debt has fallen to USD 13tn, down from a peak of USD 17tn in late August. However, this has not garnered much attention as market participants focused on China-US trade tensions and Brexit. We stand by our view that long-term USD rates (and likely G3 rates) may have already bottomed. There have been increasing signs of pushback from major central banks towards lower rates. In particular, the Bank of Japan (BOJ) may be worried about an overly flat curve negatively impacting the financial system. In addition, the markets may have to contend with ultra-long US Treasury issuances and the potential for more fiscal spending from Germany as growth stalls. We are neutral on G3 yields at current levels. Short-term volatility on trade tensions and Brexit is inevitable. Optimism on both fronts has lifted yields, but we doubt that yields could go much higher in the absence of better economic data or looser fiscal policies.



    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

     

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com

     

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