UK yield curve inverts for first time since 2008 as global market gloom sets in

LONDON (Reuters) - Britain’s government bond yield curve inverted on Wednesday for the first time since the global financial crisis, mirroring a move in the United States where it is traditionally a sign that some investors think a recession is nearing.

Workers emerge from Bank underground station with the Bank of England (L) and Royal Exchange building (R) seen in the City of London financial district, London, Britain, January 25, 2018. Picture taken January 25, 2018. REUTERS/Toby Melville

The yield on the 10-year gilt fell below the yield on the two-year gilt shortly after 1000 GMT for the first time since August 2008, according to data from Refinitiv.

Normally, a yield curve slopes upwards as investors expect to be compensated for the risk of owning longer-maturity debt.

An inversion - where shorter-dated yields are higher than longer-dated ones - is sometimes considered a warning of a risk of recession, especially in the United States.

On Wednesday the U.S. Treasury two- to 10-year yield curve similarly inverted for the first time since 2007, spurred by downbeat news on the global economy.

The curve in Britain has inverted before the recessions of 1980/81, 1990/91 and 2008/09. It was also inverted between 1997 and 2001, when the UK economy continued to grow solidly, although 2001 saw recession elsewhere.

“(The inversion) says we’re in a very negative environment, in financial market terms,” said Marc Ostwald, chief economist at ADM Investor Services, adding that the gloom surrounding the global economy was possibly overdone.

“The correct question is whether this is the end of the asset price bubble inflated by (quantitative easing),” Ostwald said.

Gilt yields were little moved by stronger-than-expected British inflation data on Thursday, which showed consumer prices rose by 2.1% in annual terms in July -- exceeding the Bank of England’s 2% target.

However, short sterling interest rate futures sold off modestly, down around 2 ticks on the day through the 2020 contracts, indicating a slightly lower chance that the BoE will be forced at some point to cut interest rates.

At 2.1%, July’s inflation figure was well above the 1.8% forecast by the BoE’s economists earlier this month.

“There are some signs there that would point to the idea that maybe the Bank of England has been right to resist the global tide of ‘let’s all have rate cuts’,” Ostwald said.

Twenty and 30-year gilt yields fell to new record lows of 0.907% and 1.057%, down around 8 basis points each on the day before recovering slightly.

Ten-year gilt yields fell 4 basis points on the day to 0.45%.

The yield spread between 10-year British and German government bonds stood at 110 basis points, little changed on the day.

Graphic by Andy Bruce; Editing by Alexandra Hudson