Gilts to test 0.1% in case of a hard Brexit, but yields could rise to 1% in case of a deal

There is nothing romantic about a candlelit dinner with Boris Johnson and Ursula von der Leyen; however, this time around it may be the trick that will bring a Brexit deal together. In the past few days, it was clarified by several politicians that a hard Brexit is very much possible, as much as a deal it is. At the time of writing, cable is moving up, ending a three-day run of losses, and Gilts are also softer. Yet, a move down of 8bps in yields since the start of the week it is a significant move given that 10-year Gilts offer around 27bps in yield. Even though tonight Santa may bring along a Brexit deal, it is essential to note that considerable obstacles continue to be ahead of the British economy. Therefore the effect of good news might wane quickly and bring the market back to reality.  As a matter of facts, the Covid-19 crisis inflicted deep scarring to the economy, which will take time to heal. The Bank of England knows it, and it is ready for more stimulus. Hence, only one outcome is possible: low Gilt yields for longer.

However, what does low mean in figure terms?

Since the beginning of August, we have witnessed to 10-year Gilt yields trading in an ascending channel. They have already tested the lower trendline three times, and if a hard Brexit comes around, they would most likely break it and move down to try the lowest yield ever recorded in history around 10bps.

At the same time, if tonight a Brexit deal is agreed upon we might see yields rising in the coming days and testing the upper resistance line at 45bps. However, we have to keep in mind that if a deal is reached, it doesn't mean it will be a good deal for the British economy. Hence, an element of a surprise amid the reaching of an agreement can still give a boost to Gilts. Regardless, there is more room for yields to rise rather than fall to historic low levels.