Forex Flash: Can UK financial repression suppress yields? – Deutsche Bank

The GBP has weakened further on the downgrade to now trade at 1.5122 and 1.1467 against the Dollar and Euro, respectively. Whilst certainly off the lows of 1.5073 and 1.1398 in the overnight session in Asia, the pound is nonetheless still weaker against the Dollar and Euro, respectively since Moody’s action.

According to Macro Strategy Analysts J. Reid and C. Tan at Deutsche Bank, “its worth noting that of the G8, only Germany and Canada now have a AAA/Aaa rating so others have shown before that losing top status needn't in itself cause any notable funding issues or sizable yield changes.”

However, the UK is going to be a great laboratory for the rest of the world as to whether financial repression (of which central bank buying and regulation are the key weapons) can continue to keep yields below the rate of inflation. Even before the most recent fall of sterling the BoE were forecasting another 3 years of above target inflation which would extend the record to 37 out of 40 quarters over 10 years if the forecasts are proved right. With this track record and forecast there is very little justifiable reason for buying Gilts at these yields unless you believe that someone is going to buy them off you at a higher price.