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Brexit sentiment drives European bond yields

November 2018

European government bond yields rose sharply in November on the news that the UK and EU had finally managed to thrash out a Brexit deal. European leaders backed the withdrawal agreement and political declaration; subsequently, however, yields subsided against mounting concern that the Brexit agreement will not receive sufficient support from UK MPs. 

  • The UK may face a no-deal Brexit, or no Brexit at all
  • Italy refused to revise its budget
  • The Fed believes that US rates are “just below” levels that would be neutral for the economy


European government bond yields rose sharply in November on the news that the UK and EU had finally managed to thrash out a Brexit deal. European leaders backed the withdrawal agreement and political declaration, and the deal was subsequently supported by the UK Cabinet, although Brexit Secretary Dominic Raab resigned. Subsequently, however, yields subsided against mounting concern that the Brexit agreement will not receive sufficient support from UK MPs. European Council (EC) President Donald Tusk warned: “If this deal is rejected in the Commons, we are left with … no deal, or no Brexit at all”. The yield on the ten-year German government bond edged down from 0.30% to 0.28% over November as a whole. 

 “Italy’s controversial budget remained a source of contention”

Italy’s controversial budget remained a source of contention between the country’s leaders and the European Commission. Italy’s Government refused to revise the budget, and may face debt-based sanctions. The International Monetary Fund (IMF) warned that Italy’s planned stimulus measures will create “substantial downside risks” that will leave the country very vulnerable. The IMF expects Italy’s public debt to remain at around 130% of GDP over the next three years, and predicts that the Italian economy will expand by only 1% in 2018-2020, and to decline thereafter. The yield on the ten-year Italian government bond rose during the month amid speculation that its budget plans could drive up borrowing costs. Over November, however, the benchmark bond yield eased from 3.39% to 3.06%.

In the US, the Federal Reserve (Fed)  remained a generally optimistic stance towards the outlook for the domestic economy. During November, Fed Chair Jay Powell stressed that US monetary policy will not follow a “pre-set” path, and indicated that interest rates are currently “just below … the level that would be neutral for the economy”. The yield on the benchmark US Treasury bond rose above 3.2% during November; over the month as a whole, its yield climbed from 3.10% to 3.11%.

Global economic growth is set to slow down against a backdrop of tightening liquidity and heightened trade tensions, according to credit ratings agency Moody’s. In particular, Moody’s believes that economic growth in the US will be constrained by declining fiscal stimuli and tightening monetary policy, and that financial volatility, term premia and credit spreads will rise on a global basis as leading central banks withdraw monetary accommodation.


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