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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Sterling slides as parliamentary suspension fuels no-deal Brexit fears - as it happened

A financial trader works at his desk at CMC Markets in the City of London
City traders are increasingly spooked by the possibility of a no-deal Brexit this autumn Photograph: Peter Nicholls/Reuters

Summary: no-deal fears hit the pound

Time for a recap

  • The pound has come under fresh pressure today after the government moved to suspend parliament for five weeks.

    Sterling tumbled by more than a cent at one stage, hitting $1.2155, after Boris Johnson’s government made the dramatic move to prorogue parliament for five weeks - much longer than normal.
  • The pound also weakened against the euro, dropping below €1.1 and heading back to the 10-year low struck earlier this month.

    It has now lost around 7% of its value since March, when Britain’s Brexit extension was agreed. Before the 2016 referendum, one pound was worth €1.30, and around $1.48.
  • The move cuts the time available to MPs to prevent a no-deal Brexit. Under a Privy Council order approved by the Queen today, parliament will rise sometime 9th and 12 September, and not return until 14 October for a Queen’s Speech.

  • Prime minister Boris Johnson has written to MPs pledging a vote on his plans after the next EU Council meeting on 17th and 18th October. This tees up a titanic clash with MPs who oppose a no deal, or who want Brexit stopped.

  • Several City economists and investors voiced concerns over the move. Derek Halpenny of MUFG said Britain faces a “constitutional crisis”, while Seema Shah of Principal Global Investors warned that Britain could be dragged into recession.

    Adam Cole of Royal Bank of Canada warned that no-deal Brexit looks more likely than before, at around 44% probability (based on market data). Deutsche Bank put the chance at 50%.

    Oliver Blackbourn of Janus Henderson Investors told clients to expect more drama in Westminster, with a likely no-confidence vote in Johnson’s government as soon as parliament returns after its summer break at the start of September.

    “Summer holidays are definitely over for MPs, now comes the shouting,” Blackbourn says.

  • Business groups voiced alarm. The British Chambers of Commerce warned that the UK was already suffering from Brexit uncertainty, and urged MPs to resist a no-deal shock.

  • Shares in UK companies who are exposed to Brexit risks also fell. Housebuilders led the fallers on the FTSE 100 index, with Berkeley Group closing 4.8% lower, and Taylor Wimpey and Barratt Development losing 3.5%.

Our Politics Live blog has all the latest from parliament:

That’s probably all for today - thanks for reading and commenting. GW

Updated

Deutsche Bank estimates that there is now a 50% chance that Britain crashes out of the European Union without a deal at the end of October.

The best way of avoiding it, they suggest, is a ‘national unity’ government. For that to happen, though, Johnson’s opponents must agree on an alternative leader.....

Derek Halpenny, head of research at financial firm MUFG, fears the pound will slide in the coming weeks - and slump to just $1.1 if a no-deal Brexit were to happen.

“Today’s development brings us firmly into the realms of a ‘Constitutional Crisis’. The proroguing of Parliament leaves an incredibly narrow window for Parliament to legislate the move, agree to an Article 50 extension or organise a no-confidence motion.

All of the above means no-deal Brexit is looking ever more likely. GBP downside risks will continue to plague the market. It is only a matter of time until the recent GBP/USD low of 1.2015 is brought even lower. The MUFG base case no-deal Brexit assumption and our current year-end target of 1.1000 remain intact.”

The Economist Intelligence Unit is hardly a hotbed of left-wing radicalism, but their managing director Robin Bew isn’t impressed by the proroguing of parliament.

The Queen didn’t hang about.

Following today’s Privy Council meeting, an order has been issue to prorogue parliament between Monday 9th and Thursday 12th September.

As expected, business would remain suspended until 14th October when the Queen would reopen parliament and outline the legislative agenda.

Some government MPs are arguing that this five-week suspension isn’t a big deal, as the Commons would have shut down for the party conference season.

However, the Hansard Society have told us that this is the longest proroguing of parliament since 1945, during Britain’s biggest political crisis in decades. There was also speculation that opposition MPs could have tried to keep parliament running through Conference season (although I don’t think a formal plan had been put forward....)

Expert: No-deal Brexit means recession

Seema Shah, chief strategist at Principal Global Investors, is alarmed to see the government flirting with a possible no-deal Brexit on 31 October.

She fears it would plunge the UK into a full-blown recession, at a time when global trade wars are also hurting the economy.

“From an economic point of view, actively pursuing a no-deal Brexit through suspending parliament is tantamount to actively pursuing a recession.

The PM’s move comes at a time when the FTSE 100 is on course to record its largest monthly fall in four years. The large, multinational businesses in the FTSE have, naturally, been highly sensitive to an escalating trade war between China and the US, particularly as the complex global supply chains of which they are parts face seismic disruptions. They are fighting political fires at home and abroad.

Shah reckons that many international investors are keeping clear of UK assets, explaining:

Although the pound had been mounting something of a feeble rally against the dollar in August – before The PM’s bombshell - it was still at rock bottom valuations against the US and Eurozone currencies.

Company fundamentals remain broadly strong so the implication is that global investors have finally reached the “do not touch” point for UK equities

The CBI are also concerned:

President Donald Trump has just backed Johnson.....

I’m sure those who criticised Barack Obama for his ‘back of the queue’ comments before the Brexit vote in 2016 will be equally upset to see another US president weighing in on UK politics.

Bloomberg reports that its customers have been frantically searching for what it means to ‘prorogue’ parliament.

That confirms that investors around the globe are taking a close interest in Brexit, as they watch the pound drop today.

The big picture is that the pound has shed 7.5% of its value over the last five months, as a no-deal Brexit has become more likely.

Sterling hit $1.32 back in mid-March, when it became clear that Britain wasn’t leaving the EU as Theresa May had hoped. It’s now 10 cents lower at around $1.22.

The pound vs the US dollar
The pound vs the US dollar Photograph: Bloomberg

Here’s a quick guide to prorogation:

There are 700 members of the Privy Council, which is one of the oldest parts of Britain’s constitutional framework. But Queen Elizabeth won’t have to drag out hundreds of cups and saucers to refresh them all.

You only need three Privy Counsellors to form a quorum (plus QEII). Two of them have already made the trip from London to Balmoral, according to the Telegraph’s Steven Swinford. That includes Jacob Rees-Mogg MP, Lord President of the Privy Council.

Updated

Shares in UK housebuilders are falling more sharply now - with Barratt Developments and Taylor Wimpey both shedding 4%.

FTSE 100 top fallers
The top fallers on the FTSE 100 today Photograph: Refinitiv

Updated

Fiona Cincotta of City Index predicts further losses for the pound, if Johnson can’t make progress on replacing the Irish backstop.

She writes;

After reaching $1.23 in the previous session sterling tanked to a low of $1.2157 on Bojo’s Parliament suspension plans.

Under these circumstances we expect the bears to remain in control of the pound. Any bad news from Brussels regarding Irish backstop alternatives as talks kick off over there could send the pound tanking back towards the key psychological support of $1.20.

Full Story

Here’s our news story on sterling’s slide today, as the government moved to suspend parliament ahead of a Queen’s Speech in mid-October.

The pound is the worst-performing major currency today, Bloomberg reports.

And things could get worse. A recent Bloomberg survey forecast that the pound could fall to $1.10, from $1.22 today, after a no-deal Brexit.

Petr Krpata, a currency strategist at ING Groep NV, says:

“It just underscores the veil of uncertainty the pound is facing, the still non-negligible risk of no-deal Brexit and the vulnerability of the currency to negative headline news.”

The imminent suspension of parliament will intensify calls to protect businesses from the disruption that a disorderly Brexit would cause.

Already today, firms have asked the Irish government for €1bn of support, to cushion the blow of a “Brexit shock” after a no-deal exit.

My colleague Lisa O’Carroll explains:

They want a slice of Ireland’s unprecedented €10.4bn (£9.4bn) corporate tax intake earmarked for business trading in both directions that will be hit by tariffs, delays in Calais and Dover and other challenges in the event of the UK crashing out of the European Union on 31 October without a deal.

John McGrane, the director general of the British Irish Chamber of Commerce (BICC), said: “By redirecting €1bn from the larger than expected corporate tax intake into a Brexit response fund, government can shore up indigenous businesses which are most at risk from a disorderly Brexit.

RBC: No-deal Brexit more likely than ever

Analysts at Royal Bank of Canada have warned that the probability of a no-deal Brexit has risen to 44%, based on today’s market moves.

RBC’s chief currency strategist, Adam Cole, says this is a new high, and a move that is matched by the euro’s rally against the pound today.

He explains:

Using our usual proxy markets as a barometer, the net effect of this morning’s UK news has been to push the probability of no deal exit to a new high of 44% (blue line) and we note that (focusing on daily changes rather than levels), GBP price action still closely mirrors shifts in this probability.

Brexit risks
The market implied chance of a no-deal Brexit (blue line) has risen to a new high today Photograph: RBC Capital Markets

Cole adds:

Today’s developments make exit with no deal marginally more likely (and some will say reveal a government preference for no deal), but it is still far from a certain prospect while parliament has possible routes to block it and while the possibility (albeit slim) still exists that Johnson could extract a deal from the EU that parliament can support.

A renewed Brexit crisis increases the danger that Britain’s economy falls into a technical recession this autumn.

We learned earlier this month that UK GDP contracted by 0.2% in April-June, as companies ran down stocks build up ahead of the original Brexit deadline of 29th March.

If the economy keeps shrinking in the current quarter (July-September), then the UK would officially be in recession for the first time in a decade.

Sky News’s Ed Conway shows how Britain is underperforming other major economies:

Brexit angst is also pushing down the FTSE 250 stock market index of medium-sized, mainly UK focused companies.

It has fallen by 0.8%, or 155 points, this morning to 19,179 points.

Almost every sector has fallen, led by industrial firms and consumer goods producers (both down 1%). Financial stocks, which would also suffer from a no-deal Brexit, are down 0.8%, followed by healthcare and energy firms.

The larger blue-chip FTSE 100 is up 9 points, or 0.15%, with multinational companies (who earn money mainly in foreign companies) benefitting from the weak pound.

But housebuilders are still suffering, with Berkeley losing almost 3% today.

Updated

BCC: Brexit crisis is damaging the economy

UK businesses are watching events in parliament with growing frustration and alarm, judging by this statement from Dr Adam Marshall, director general of the British Chambers of Commerce:

“Businesses feel like Westminster is playing an endless game of political chess, while their futures and the health of the UK economy hang in the balance.

“Every move in this game is prompting more questions, not just amongst businesses here at home but also amongst their partners around the world. Out in the real world, continuing political turbulence is taking a toll on contracts, on investment decisions, and on business confidence. Three years on, the damage continues.

“The top priority for businesses and the economy is still to avoid a messy and disorderly exit from the EU on the 31st of October. Despite the noise, none of the events of the last few days have given businesses greater confidence that this will be achieved. Given this, it is essential for government and its agencies to further boost support for businesses through any scenario.

“Once again, businesses will have to try their best to prepare for an unclear future as the political process goes down to the wire.”

Updated

Here’s our news story about the government’s plan to suspend parliament next month:

The pound has now fallen through €1.1 against the euro, after the House of Commons speaker John Bercow issued a blistering attack on the government’s plan.

That’s a one-week low, down 0.7% today, towards the 10-year low of €1.072 struck earlier this month.

Bercow is accusing the government of “a constitutional outrage”, warning that shutting down parliament to prevent a proper Brexit debate would be “an offence against the democratic process.

German bank Berenberg isn’t convinced that suspending parliament strengthens Boris Johnson’s hand.

The argument is that preventing MPs blocking No Deal makes the threat more credible, forcing Brussels to compromise and drop the Irish Backstop (which keeps the UK aligned with the EU if a free trade deal isn’t agreed after Brexit).

Holger Schmieding, Berenberg’s chief economist, says this logic is flawed, for three reasons:

  • The EU is already taking the hard Brexit risk seriously.
  • Even if Johnson tries to ramp up the pressure, the much bigger EU would still believe that the UK has much more to lose from a hard Brexit than the EU.
  • The move strengthens the EU suspicion that Johnson’s prime motive is to win snap elections shortly after Brexit rather than to conclude a deal with the EU

Instead, suspending parliament also accentuates the UK’s constitutional crisis, he tells clients in a research note (online here), concluding:

In a way, a need for a Prime Minister to suspend his own parliament because he seems to lack a majority for his key policy – the approach to Brexit – is not exactly a sign of strength, to put it mildly.

City investment management firm Brooks Macdonald has warned clients that the risk of a no-deal Brexit is rising.

It is maintaining an “underweight” rating on UK assets -- a polite way of saying they they’re assessing British stocks with a lengthy bargepole.

Brooks Macdonald says proroguing parliament, even over the Party Conference season, will restrict parliament’s options:

With only 22 scheduled business days for the House of Commons between now and the Brexit deadline, removing around a third of these will cause procedural issues for opposition plans to legislate to prevent a no deal Brexit.

Sterling’s reaction has been for a sharp fall vs both the dollar and euro from already suppressed levels. Domestic focused UK stocks have underperformed International peers as the heightened risk of a no deal secession begins to be priced into markets.

With the outcome of Brexit remaining volatile and unclear, sterling will remain under pressure and trade within a range that reflects the dual possibilities of a deal and a disruptive exit. As a result we maintain our underweight to UK assets despite the valuations on offer.

Updated

Mujtaba Rahman, analyst at Eurasia Group, says Boris Johnson has dramatically raised the stakes in his battle with MPs trying to stop a no-deal Brexit.

Now that Boris has gone nuclear, it may require MPs to switch back to their own nuclear option—passing a no-confidence vote in the Government next week.

The PM’s aides insist it is normal for a new Government to hold a Queen’s Speech and deny the charge of suppressing debate, though few MPs will believe that.

Boris allies stress that his twin-track strategy is on track and unchanged by the move. They hope that showing that Parliament cannot stop no-deal will put more pressure on the EU to make concessions over the Irish backstop.

MPs will try every trick in their book to stop Johnson’s plans and now try to pass a law in the short September session. They will likely win the backing of the Speaker John Bercow. Ultimately, the major constitutional row could be resolved in the courts.

Johnson has now written to MPs, confirming that he will seek to suspend parliament in the “second sitting week of September”.

That will be shortly after MPs debate Northern Ireland on the 9th September.

He adds that MPs will vote on his legislative plans on 21st and 2nd October, a week after the Queen’s Speech and just after the crucial European Council meeting of EU leaders of 17-18th October.

Johnson is also promising parliament a vote on any new deal he agrees with the EU, after that Council meeting.

Updated

Queen's Speech confirmed

Prime minister Boris Johnson has now confirmed that the Queen’s Speech will be delivered on 14th October.

That means parliament will be suspended at some stage ahead of that date.

In a video clip just broadcast, Johnson also denied that parliament was being sidelined. There will be “ample time” to debate Brexit, he insists, ahead of the next EU council meeting on 17th-18th October.

That summit feels like the last chance for the UK and EU to agree any changes to the current Withdrawal Agreement ahead of 31st October deadline.

Updated

The plan to suspend parliament until mid-October has damaged hopes that the UK could avoid crashing out of the European Union without a deal, says Ricardo Evangelista, senior analyst at ActivTrades.

Sterling rallied yesterday, after opposition leaders had agreed on a strategy to prevent a no-deal Brexit, but has lost all those gains this morning.

Evangelista explains:

The markets regard no deal as the worst possible outcome for the British economy and news that there will be a cross party effort to counter Prime Minister Johnson’s plans to leave on the 31st of October no matter what, were enough to fuel Sterling gains of nearly 0.5% to the Dollar.

However, these gains have been completely cancelled during early Wednesday trading, as reports emerge that Boris Johnson will ask the Queen to suspend parliament from mid-September until mid-October; a move seen as a way to ensure his plans of a no-deal Brexit are executed, without interference from MPs opposed to such an outcome.

Shares in some UK-focused companies are also dropping, hit by fears of a no-deal Brexit.

Housebuilders are among the top fallers on the FTSE 100 index, with Taylor Wimpey and Persimmon both losing over 2%.

You know things are getting serious when MPs are tweeting graphics of the pound-dollar exchange rate:

The pound has now hit a one-week low against the US dollar at $1.218, down more than a cent today.

Naeem Aslam of Think Markets says they could be further losses, if the Queen agrees to suspend parliament until the middle of October.

He explains:

Sterling has fallen off the cliff as investors have become increasing anxious about the Brexit chaos. Boris doesn’t want anyone to stop his plan of no Brexit and if the Queen approves his request then there is only his way or the highway.

The ride on this highway is going to be more turbulent than ever and British politicians do not realise this. They have made a circus out of Brexit.

For speculators, the focus is going to be on one thing only: is the Queen going to approve the request. If she does then expect a major deeper sell off for sterling.

Prorogation is the official term that marks the end of a parliamentary session. After being advised to do so by the prime minister, the Queen formally prorogues parliament. This takes the form of an announcement in the House of Lords on the Queen’s behalf. It is a speech, written by the government, which usually describes the bills that have been passed during that session and summarises what has been achieved.

It means that all work on existing legislation stops, and MPs and Lords stop sitting. Prorogation also automatically kills any bills, early day motions or questions to ministers going through parliament. 

Parliament can then be reopened a few days later with a fresh slate of legislation intentions, set out in a new Queen’s speech at the formal state opening of parliament.

City traders are calculating that the risk of a no-deal Brexit has risen, and acting accordingly (by hammering the SELL THE POUND button).

The selloff is gathering pace -- with the pound now down almost a whole cent at $1.22.

There have been rumours for weeks that Boris Johnson prorogue parliament, in an attempt to thwart MPs who oppose a no-deal Brexit.

But today’s today’s developments have still come as a nasty surprise to the City, which is why the pound is reacting so sharply.

On Sunday, the Observer reported that Johnson was seeking legal advice on whether to shut parliament down for five weeks, despite concerns that a no-deal Brexit could cause economic chaos.

My colleague Frances Perraudin has all the details from Westminster:

The BBC’s Laura Kuenssberg has heard that Boris Johnson’s plan is to hold a Queen’s Speech - outlining the legislative priorities - on 14th October.

That’s just two-and-a-half weeks before the UK is due to leave the EU.

She adds that parliament could be suspended, or prorogued, more than a month earlier until around 11 September (it was already expected to pause for the autumn party conference season).

The pound has also dropped against the euro to €1.103, from €1.108 yesterday (a one-month high).

Pound hit by Brexit prorogation rumours

Newsflash: The pound is suddenly sliding, on reports that Boris Johnson’s government is taking steps to prevent MPs blocking a no-deal Brexit.

There’s a rumour that Britain’s Privy Council (a group of senior, experienced advisors and politicians) will meet with Queen Elizabeth at Balmoral, her Scottish castle, later today to discuss the possible suspension - or proroguing - of parliament.

My colleague Heather Stewart, and the BBC’s Nick Robinson, have both heard the details....

Proroguing parliament could prevent MPs from taking a no-deal Brexit off the table, through legislation or via a no-confidence vote in Johnson’s government.

These rumours have knocked half a cent off the pound, down to $1.223 against the US dollar. That wipes out Tuesday’s gains, which came after Johnson said he was ‘marginally’ more confident of agreeing a new deal with the EU.

The pound vs the US dollar today
The pound vs the US dollar today Photograph: Refinitiv

Updated

Brexit Dashboard shows economic conditions worsening

The Guardian’s latest Brexit dashboard is out today, and it shows that the UK economy faces a turbulent autumn- having already contracted slightly in the April-June quarter.

My colleague Richard Partington explains:

Boris Johnson is heading into the crunch period for Brexit negotiations with the UK economy potentially on the brink of recession and as global economic growth falters, according to a Guardian analysis of economic news over the past month.

The prime minister faces the challenge of breaking the deadlock with Brussels to avoid a no-deal Brexit on Halloween, just as the outlook for the economy deteriorates at home and abroad.

The latest phase of talks came as Britain recorded the first fall in quarterly GDP since 2012 and as Donald Trump engages the US in a trade war with China, dragging down global trade volumes and economic growth. Economists warned that the wider global slump raised the chances of a prolonged downturn in Britain and made it more difficult for the UK to rely on trade with other nations to boost the economy after leaving the EU.

Writing in the Guardian, David Blanchflower, a former member of the Bank of England’s monetary policy committee (MPC), said the UK’s withdrawal from the EU “couldn’t have come at a worse time” as the world economy slows.

“Businesses remain largely unprepared for a disastrous cliff-edge no deal and are in sit-and-wait mode while business groups continue to speak out against the economic chaos,” he added.

Here’s the latest dashboard, which shows how the pound has been volatile as the risk of a no-deal Brexit has risen:

Worryingly, the US yield curve is continuing to invert this morning.

The gap between 2-year and 10-year bond yields has swelled to 6 basis points, its biggest gap since 2007 (as the financial crisis took hold).

The yield on 30-year US government bonds has just hit a record low too, at just 1.9% -- below the interest rate on 3-month debt. Not a good sign.....

Expert: Trade war tensions to blame

In normal times, the state of the US yield curve would only be of interest to bond traders, as they chase the best possible return while balancing risk.

But once it’s inverted, the yield curve becomes a lot more interesting -- because of its reputation as a harbinger of recession.

Craig Erlam of City trading firm OANDA, blames the latest escalation in the US-China trade war, with both sides announcing new tariffs late last week:

I fear yield curve inversions are going to become the dinner table bitcoin chat of 2017 in the coming months as prophecy becomes self-fulfilling and we blindly wander into a recession.

Obviously the timing of this is no coincidence, coming so shortly the US and China decided to step it up a gear and inflict additional tariffs on one another. Naturally this was accompanied by fighting talk from Trump, the usual bashing of the head of his central bank and then some very mixed messages from both sides regarding a phone call that may or may not have happened.

With stock markets flat today, we’re clearly not yet seeing widespread panic about the latest recession warning but the heightened sensitivity to it may eventually take its toll. In much the way that people are questioning whether talk of recession makes one inevitable, the impact on stocks could become self-fulfilling.

Updated

Bloomberg’s David Ingles has spotted that the entire spectrum of US government Treasury bonds are now yielding less than 2% per year.

That suggests quite a lot of pessimism about long-term growth prospects.

The Financial Times is also concerned about the US government bond market, saying it is giving “the most dire signal since 2007”.

Here’s a flavour:

A widely watched US bond market indicator of recession sent its most dire signal since the early days of the financial crisis on Tuesday, reflecting increasing gloom about the economic consequences of the US-China trade war.

Yields on two-year Treasury notes were 5.3 basis points higher than those on the 10-year government bond — the largest gap since March 2007.

This kind of inversion of the yield curve — in which shorter-term rates are higher than longer-term ones — has preceded every US recession of the past half century.

At the same time, another closely followed portion of the yield curve — reflecting the difference between the yields on three-month and 10-year Treasury securities — blew past its recent lows, settling at minus 51.4bp.

This excellent chart from CNBC shows how US bond yields have fallen sharply in recent months.

US yield curve

Yields, or the rate of return on a bond, move inversely to prices. So as concerns over economic growth have risen, investors have been scrambling to buy bonds, pushing prices up and yields down.

Updated

Introduction: Yield curve flashes warning lights

The trading floor at the New York Stock Exchange (NYSE) yesterday
The trading floor at the New York Stock Exchange (NYSE) yesterday Photograph: Andrew Kelly/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Recession worries are swirling in the markets today, as the US bond market continues to flash warning lights.

Overnight, the US bond yield curve slipped deeper into inversion -- a classic warning sign that a downturn could be approaching (but not an infallible one...).

That means longer-term US bonds are trading at a lower interest rate than longer-term debt -- inverting the principle that investors demand a higher rate of return for lending for longer.

Specifically, 10-year Treasury bills are changing hands at a yield of just 1.47% this morning, very low in historic terms, compared to 1.51% for 2-year bonds. That’s because investors are piling into the safe assets such as long-term American government debt, suggesting they are worried that the economic outlook could be souring.

Such an inversion has preceded every US recession in the last 50 years, which is why it’s causing such concern on the trading floors.

In normal times, longer-dated bonds trade at a significantly higher yield to short-term ones, reflecting the extra risk that an investor is taking (a lot can happen in a decade).

This move appears driven by concerns that the US-China trade war is escalating, and the risk of a no-deal Brexit in two months time. There’s also uncertainty over how America’s central bank will respond to the slowdown, and to a barrage of criticism from president Trump.

Readers may recall that the US yield curve inverted a couple of weeks ago, triggering an 800-point tumble on the Dow Jones industrial average.

But this latest move is bigger -- and importantly the yield curve closed lower last night, rather than just dipping into inversion and then coming out again (as happened two weeks ago).

What is the yield curve?

This is the line plotted on a graph that shows the rate of return on government bonds to their date of maturity. 

Government bonds – known as gilts in the UK, treasuries in the US and bunds in Germany – are debt issued over a fixed period of time, typically three months, two years, 10 years and 30 years, to fund government spending.

The yield is the rate of return investors receive. Maturity is when the government repays the debt at the end of the term. When more investors are buying government bonds prices go up, and yields drop.

Companies can also issue bonds.

What happens when the yield curve inverts?

This is when the yield on short-term bonds is higher than on long-term bonds. It means that traders are accepting a lower interest rate to hold longer-dated bonds than the shorter-dated alternative.

It’s relatively rare – investors typically get higher returns for lending over the long term, as this is seen as riskier than short-term lending. They also expect to be compensated for the impact of inflation, which will eat into investments over time.

What does it mean?

An inverted yield curve is a classic signal of a looming recession – in the US, the curve has inverted ahead of every recession over the past 50 years. It falsely signalled a recession just once, at the time of the 1998 Russian financial crisis.

For other countries the signal is less clear. Several have experienced long periods of inverted yield curves without a subsequent recession, notably the UK in the 1990s.

Why is it happening now?

The yield curve for two- to 10-year US government bonds has inverted for the first time since 2007, just before the start of the global financial crisis. This indicates that investors are seriously worried about an economic downturn, which would keep inflation low. They are worried about the impact on the already-weak global economy of the prolonged trade war between the US and China, along with Brexit.

Is recession inevitable?

No, but it is highly likely. And an inverted yield curve driven by recession fears risks becoming a self-fulfilling prophecy, knocking confidence and causing businesses to cut back on investment.

How soon does recession tend to follow yield curve inversion?

Previous downturns show that yields have typically inverted 18 months, on average, before a recession began. Julia Kollewe

Tom di Galoma, a managing director at Seaport Global Holdings, says the yield curve is giving “the ultimate flashing red light,” adding:

“What is taking place today is that bond investors are realising that lower rates are upon us.”

He’s also concerned that 10-year bonds are actually yielding less than 3-month T-bills - something that also occurred before the financial crisis more than a decade ago.

More to follow....

The agenda

  • 7am BST: GfK survey of German consumer confidence
  • 3.30pm BST: US weekly oil inventory figures

Updated

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