German 10-yr yields below zero as pound slides on Brexit risk

BLOOMBERG

Increasing odds of a U.K. exit from the European Union boosted demand for havens, sending Germany’s 10-year bond yields below zero for the first time. Stocks fell and the pound slumped to a two-month low.
Treasuries also jumped and yields fell to records in Australia and Japan after four polls showed the campaign to take the U.K. out of the world’s largest trading bloc had increased its lead before the June 23 referendum. Britain’s best-selling newspaper, The Sun, backed an out vote. The MSCI All-Country World Index fell for a fourth day in the longest slump in four months, while the yen rose against its 31 major peers. U.S. oil slipped toward $48 a barrel.
As sovereign bond yields moved further into uncharted territory, measures of expected price swings in the British currency and European stocks surged on concern Brexit poses an increasing risk to the world economy and will stoke market volatility. Traders are also positioning themselves before monetary policy reviews by the Federal Reserve and Bank of Japan this week. “Nobody buys bunds at these yield levels thinking they are attractive,” said Jussi Hiljanen, head of European macro and fixed income strategy at SEB A/B in Stockholm. “Demand for haven assets are being driven by fear of Brexit and growth concern. Investors are buying bunds as a hedge against uncertainty.”
The Fed starts a two-day policy meeting on Tuesday, with futures market indicating there’s zero chance of an interest-rate hike. The odds have collapsed since a report June 3 showed the weakest payrolls in almost six years. The chances of a rate increase by the December policy meeting are less than 50%, from 74% at the end of May.

Bonds
Germany’s 10-year bond yield dropped three basis points, or 0.03 percentage point, to minus 0.01 percent as of 8:50 a.m. New York time, meaning that investors who buy and hold the securities until their due date will get back less than what they paid.
The NumberCruncherPolitics estimate of the probability of a Brexit surged to 32.6 percent on Monday from 23.7 percent and Oddschecker’s survey of bookmakers’ implied probabilities rose to 42.5 percent on Tuesday morning. “The momentum is such that it seems inevitable Brexit will be favorite by the weekend,” said William Hill Plc spokesman Graham Sharpe. Japan’s yield fell to an unprecedented minus 0.175 percent and those on on similar maturity debt in Australia and New Zealand also touched fresh lows.
Treasuries rallied for a sixth day, with the yield falling two basis points to 1.60%, having reached the lowest since Feb. 11. Europe’s higher-yielding sovereign bonds under-performed as investors await the British referendum, which is followed three days later by Spain’s general election. The country’s 10-year bonds yields increased for a third day, rising four basis points on Tuesday to 1.54%, while Italy’s increased four basis points to 1.49%.
The cost of insuring corporate debt against default was at the highest since March. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies jumped six basis points to 87 basis points. A gauge of swaps on junk-rated companies climbed 23 basis points to 369 basis points.

Currencies
The pound weakened 0.9 percent to $1.4149. Four opinion polls from three separate companies have put the campaign for Britain to leave the EU in front of the “Remain” camp. A gauge of the pound’s anticipated volatility over the next two weeks — a period that includes the June 23 referendum — climbed to the highest on record.
“Risk sentiment has taken a beating with volatility up partly on latest Brexit polls still showing the U.K. is on course to quit the European Union,” said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd. in Sydney. “Amid all of this, the yen continues to demonstrate its preeminent safe-haven characteristics.”
Japan’s currency strengthened 0.5 percent, nearing its highest level since 2014. Against the euro, Japan’s currency rose for a sixth day, gaining 0.9 percent.
China’s yuan weakened in Shanghai to within 0.2 percent of a five-year low reached in January, when a slide in the currency heightened concern about the health of the nation’s economy and spurred a selloff in global stocks and commodities. The MSCI Emerging Market Currency Index dropped 0.5 percent and is down 1.5 percent in four days. Russia’s ruble and Poland’s zloty led declines, declining at least 1.3 percent.

Stocks
The Stoxx Europe 600 Index slid 1.3 percent in London, heading for its biggest five-day decline since February, amid investor concern that the tide has turned in favor of Britain seceding from the EU.
A measure of euro-area stock volatility jumped 6.3 percent, putting it on course for the biggest five-day gain since August.
All 19 groups on the Stoxx 600 fell, with miners and carmakers sliding the most. Among shares active on corporate news, GAM Holding AG tumbled 18% after the Swiss asset manager said first-half profit will probably halve as performance fees dry up.
Futures on the S&P 500 slipped 0.3 percent, indicating equities will extend losses after falling for a third day on Monday — their longest losing streak in a month. They stayed lower even as a report showed retail sales rose more than forecast in May, showing consumer spending will help boost economic growth in the second quarter.
The MSCI Emerging Markets Index fell 0.7%, losing 4.7% in four days. Equity benchmarks in Russia, South Africa, and the Philippines declined at least 1.3%.

Commodities
Commodities followed equity markets lower. Oil fell for a fourth day, with West Texas Intermediate crude sliding 1.3 percent to $48.25 a barrel and Brent dropping 1.3 percent to $49.72.
The global oil market surplus is shrinking more quickly than expected and the market will be almost balanced next year as demand rises faster than production, the International Energy Agency said on Tuesday. Zinc led a decline in industrial metals, falling 2.2 percent to $2,031 a ton. Copper lost 0.9 percent while aluminum gained 0.3 percent after Chinese smelters reached an agreement that could to cut production. Gold dropped 0.2 percent to $1,285.74 an ounce.