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Eurozone bond investors turn to Britain to set post-Brexit policy tone

[LONDON] Eurozone bond investors turned their attention to Britain on Thursday, with the Bank of England set for its first meeting after the Brexit vote which could set to the tone for easier monetary policy around the world.

BoE meetings have in recent years gained little attention on the continent, especially as the bank has held interest rates steady since 2009, but the uncertainty it has layered on top of stuttering global growth could potentially require another round of stimulus from major central banks elsewhere.

Nearly two thirds of the 60 economists polled by Reuters on Wednesday said would chop at least 25 basis points from the 0.5 per cent Bank Rate. Financial markets have almost completely priced in a cut, although sterling and Gilt yields rose slightly on Thursday in a sign that doubts were starting to creep in.

Money markets are pricing around a 30 per cent chance that the European Central Bank cuts rates by a further 10 basis points to minus 0.50 per cent next week, and a cut is fully priced in by the end of the year.

"The ECB has the luxury to sit a little bit longer on the sidelines and judge the impact of the referendum on Europe, but that said it has increased our confidence that they will cut rates further in September," Rabobank's senior fixed income strategist Richard McGuire said.

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German 10-year bond yields, the euro zone benchmark, rose 1 basis point on Thursday to minus 0.13 per cent, following a similar rise in British equivalents which were up 2 bps at 0.77 per cent.

Both though remain within sight of record lows, as worries about a sluggish global economy has reinforced demand for safe haven bonds even at implausibly low levels.

Germany became the second G7 nation after Japan to issue 10-uear bonds with a negative yield on Wednesday, while Switzerland sold bonds maturing in 2058 at a negative yield. There was also robust demand for 30-year US debt resulting in a record low yield on this maturity at auction.

"Equity and bond markets have been doing well, partially driven by the assumption that the BoE will act to stabilise the economy," Societe Generale's senior rates strategist Ciaran O'Hagan said.

"A failure to do so could have negative repercussions for risk markets as well as bonds."


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