UK bond yields hit an all-time low on Monday while rates on German debt pushed further into negative territory as investors sought safe haven following a vote to leave the EU.
“Markets are in unknown terrain, creating exaggerated reactions,” analysts at BNP Paribas wrote as UK 10-year bond yields fell to 0.963 percent and their German equivalents stood at -0.099 percent.
British finance minister George Osborne sought to reassure markets in a statement early on Monday, saying that the UK economy was “as strong as could be” and that the UK is “ready to confront what the future holds for us from a position of strength”. Osborne has also said that there would be no immediate emergency budget. He cautioned during the referendum campaign that Britain leaving the European Union could trigger a financial crisis that would necessitate a £30 billion package of spending cuts and tax rises. However Osborne has now said that the task of dealing with the consequences of the Brexit on public finances would have to wait until a new Prime Minister and a new Chancellor of the Exchequer is chosen in Fall.
Leading Brexit campaigner Boris Johnson insisted that “the negative consequences are being wildly overdone” in a Monday column for the Telegraph newspaper. He added that markets and the currency were “stable” in comments to journalists outside his London home.
But with the pound hitting its lowest point against the dollar in more than 30 years and stocks in British banks, airlines and property firms plunging, investors have sought out the perceived security of government bonds across Europe. Yields on French, Italian and Spanish 10-year-bonds also fell, although none was in such high demand as German debt.
Moody’s Analytics, one of the biggest credit rating agencies, has downgraded the UK’s credit rating outlook from “stable” to “negative” following the Brexit. Moody’s has predicted that the negative consequences of the Brexit on economic growth would outweigh any finances that Britain will save from no longer having to contribute to the European Union.
“During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth,” the agency said.
Markets are keenly awaiting any sign from European leaders on the next stages in the Brexit drama.
The UK has yet to submit formal notification of its intent to leave — and European partners cannot force it out until it does so.
Only Britain can trigger Article 50 of the Lisbon treaty, which locks the UK in a two-year deadline to formally exit the European Union. David Cameron has said that he will leave the task of invoking Article 50 to the Prime Minister who will succeed him in Fall.
German Chancellor Angela Merkel rejected calls from France and the bosses of the European Commission and European Parliament for Britain to go quickly over the weekend.
The leader of Europe’s largest economy is to meet President Francois Hollande of France and Prime Minister Matteo Renzi of Italy on Monday before a summit of all 28 EU leaders on Tuesday and Wednesday.