Why do U.K. 10-year gilts yield 0.87% when inflation expectations are 2.7%? I am thinking of shorting 10-Year Long Gilt Sep '19 (GU19) . I understand that it's not an arbitrage and that UK bond yields could even go negative, as they have in the Eurozone, Switzerland, and Japan. But I don't understand -2% real yields and think they are unsustainable.
Yes, but their expected inflation is higher than in the U.S. and the 10-year interest rate is more than 1% lower.
You are absolutely right! Real yields are a MAJOR joke in the UK. This is not only a short - this is a mega short. There is no inherent risk premium in UK bonds. Lately, I spoke to an asset manager at Aberdeen (several hundred billion AUM). He said, the craziness stems from regulatory duties on asset managers, life insurers and else to hold AAA bonds in their portfolios - which is an absolute joke.