By Andy Bruce
LONDON (Reuters) – For all the Brexit tumult, one thing that has remained strong and stable — to borrow a phrase Prime Minister Theresa May once used to describe her leadership — is demand for British government debt.
Political crises have pushed up borrowing costs in euro zone countries such as Greece and Italy in recent years.
In Britain, Parliament has rejected May’s divorce deal three times and failed to back an alternative, risking a chaotic no-deal Brexit as soon as April 12, although May on Tuesday announced cross-party talks to break the impasse.
But interest rates on Britain’s roughly 1.5 trillion pounds ($2.0 trillion) of government bonds, known as gilts, have fallen.
The main reason is that gilts, representing one of the world’s major government bond markets, are influenced mostly by the ebbs and flows of the global economy and financial markets.
But other factors are at work too.
Below is a look at some of the reasons for the strong demand for gilts in the face of Britain’s political chaos.
The central banks of the United States and the euro zone recently rowed back on their plans to remove the stimulus they have been providing since the global financial crisis, reflecting worries about a slowdown in the global economy.
This has been a major factor in driving gilt yields lower and they have fallen this year in step with those of other major government bonds across the Group of Seven rich countries.
(GRAPHIC-G7 benchmark 10-year government bond yields, https://tmsnrt.rs/2CRlp8T)
Last week the 10-year gilt yield fell below 1 percent for the first time in 18 months, although it rebounded to 1.07 percent on Wednesday as investors judged May’s latest plan as likely to cut the risk of a no-deal Brexit.
STILL A SAFEHAVEN
British government bonds retain high credit ratings even after losing their top-notch triple-A grades as Britain’s economy and public finances struggled to recover from effects of last decade’s global financial crisis.
Part of gilts’ appeal is Britain’s track record, stretching back hundreds of years, of not defaulting on its debt, bolstered by the fact it issues its own currency.
Although British government debt levels rocketed in the aftermath of the crisis, gilts are still regarded by investors as a safe place to store money when the going gets tough.
“Ultimately, there’s someone always willing to buy the debt, unless you make a complete hash of it — we’re talking the Venezuela, Turkey arena,” said Marc Ostwald, chief economist at ADM Investor Services.
British domestic investors like pension funds and insurance firms, plus the Bank of England, account for the vast majority of gilt holdings, cutting the risk that a sell-off from foreign owners of gilts would wreak havoc in the market.
Foreign owners accounted for 25 percent of British government debt securities in 2017, compared with 30 percent in Italy and 47 percent in France, according to Eurostat data.
LONG IN THETOOTH
When a government bond matures, meaning the government repays bondholders what they have lent it, they have an opportunity to move their money elsewhere if they choose.
The average maturity for gilts is much longer than for equivalent European government bonds, meaning investors have fewer opportunities to move out of British debt — another factor that adds to the relative stability of gilts.
The average maturity for British bonds is 14.9 years, compared with 7.5 in France, 6.9 in Italy, and 6.3 in Germany, according to European Central Bank data.
BREXITEFFECT? LOOK TO THEFTSE
Gilts’ current strength also probably reflects the relatively poor performance of the British stock market, which along with the pound has borne the brunt of shifts in investor appetite in response to Brexit developments.
Although the FTSE 100 is up 10 percent year-to-date, it is vying with Spain’s IBEX as the worst performer among the major European bourses in 2019.
Some of the money that could have sent British stocks higher probably found its way into gilts.
“People say ‘what about Brexit?’, but investors say ‘where else am I meant to invest my money’?” Ostwald said.
(GRAPHIC-Performance of European stock markets in year-to-date, https://tmsnrt.rs/2CSg4OK)
(Reporting by Andy Bruce; Editing by Catherine Evans)