London: The UK’s 10-year government bond yield dropped to a record before the nation’s referendum on European Union membership.

Gilts rallied with Treasuries and German bonds as investors seek havens as global economic optimism cools, and before Britain votes on whether to remain in the bloc on June 23. The Bank of England may ease policy if the nation decides to leave, according to Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment bank unit. That’s supporting gilts, even as concern the UK may quit the EU has made the pound the worst-performing Group-of-10 currency this year.

“Gilts and government bonds are driven by risk aversion and position squaring into the referendum,” said Kumar. “Investors would be wary to have much risk over the vote given the binary nature of the event. So, fixed income should rally. And if the UK does vote to leave, the Bank of England would go much more dovish, and that is bullish for the front end of the UK government bond yield curve.”

UK 10-year gilt yields fell three basis points, or 0.03 percentage point, to 1.228 per cent as of 9:44am. London time. It earlier touched 1.220 per cent, the lowest since Bloomberg started tracking the data in 1989. The 2 per cent security due in September 2025 rose 0.225, or £2.25 per £1,000 ($1,445) face amount, to 106.725. The yield on German 10-year bonds fell, matching a record-low 0.033 per cent reached on Wednesday.

Macro backdrop

The yield could fall further to 1 per cent in the event of Brexit, according to Daniela Russell, a portfolio construction associate at Legal & General Group Plc in London. She said new lows may be seen in the coming months.

“The broad global macro backdrop has softened again,” Russell said. “So even if the market feels some relief after a vote to remain, we are going to have to wait several months for it to become clear whether the recent weakness in the UK data is just Brexit-uncertainty-related. Given the proximity of the referendum now, Tuesday’s long auction suggests that the auction results today may not be quite so impressive.”

The Debt Management Office plans to sell 900 million pounds of index-linked debt due in 2036, in its last sale before the referendum. At an auction two days ago of 30-year conventional gilts, demand dropped to the lowest level since 2007.

The pound fell 0.3 per cent to $1.4454. It’s down 1.9 per cent against the US currency this year.