Gilt yields turn negative following Carney speech

The gilt affected matures in March 2018 and now yields -0.04%, which Hargreaves Lansdown has described as "a landmark for the UK interest rate environment". Negative rates have occured despite the fact the ratings agencies have downgraded UK government debt in light of the Brexit vote.

The benchmark UK 10 year gilt is now yielding 0.87%, down from 1.37% before the referendum vote, and 4.5% before the financial crisis.

Meanwhile the stock market has risen sharply after Carney’s speech, which Hargreaves Lansdown says is due to a 3.5% dividend yield from the stock market appearing more attractive than interest rates on cash and bonds, which are likely to stay lower for longer.

Markets are now pricing in a one in four chance of base rate turning negative over the course of the next year.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, commented: "The UK is now officially through the looking glass, as the Brexit vote has pushed gilt yields below zero for the first time. Remarkably markets are now expecting interest rates to lurch downwards, despite already being at record lows.

"Such low interest rates are great for borrowers, but awful for cash savers, and for banks. Cash savers have already suffered 7 years of ultra-low interest rates, and on current expectations it looks like they will comfortably see out a decade without getting a half-decent return on their deposits.

"The stock market likes falling interest rates though, and indeed the accompanying fall in the pound, so understandably the FTSE rose on the back of Mark Carney’s comments. In a world where you have to pay money to lend to the government, an investment in the stock market which pays you three to four percent a year looks attractive, even if it can be volatile.

"In his speech yesterday, Mark Carney did issue a warning that there is a limit to what central banks can do, and that the fate of the UK economy also depends on the actions of others. It is unclear whether he was referring to the forthcoming EU negotiations, or whether he is hinting to the Treasury that fiscal policy needs to join in the battle to stimulate the economy. Either way, with interest rates approaching zero, the Bank of England is testing the limits of its powers."