Investors are losing confidence in the Bank of England’s ability to support debt markets during the Brexit – that is, if one looks at the performance of long-term sterling bonds.

According to Bloomberg, holders of such bonds have lost about 10% in less than two months following the BOE’s decision to buy corporate debt as part of its new stimulus program.[1] The new stimulus, which was announced in August, includes a £70 billion bond buying program targeting both government and corporate debt. The central bank said it will buy £60 billion worth of government bonds and £10 of sterling-denominated investment-grade corporate bonds.[2]

The BOE also slashed interest rates to a new record low of 0.25% in order to mitigate expected damage from the June 23 Brexit vote.

While the moves initially boosted investor optimism, concerns about a so-called “hard Brexit” have pushed sterling deeper into the abyss. The British currency has lost around 18% since the Brexit vote, with losses accelerating in October after British Prime Minister Theresa May said her government would pursue a hard exit from the European Union.

In a speech to delegates in early October, May said she would not consider a “trade-off” between controlling immigration and maintaining trade with the rest of Europe.

On Britain’s future relationship with the EU, the prime minister said: “I want it to include cooperation on law enforcement and counter-terrorism work.  I want it to involve free trade, in goods and services.  I want it to give British companies the maximum freedom to trade with and operate in the Single Market – and let European businesses do the same here.

“But let me be clear.  We are not leaving the European Union only to give up control of immigration again. And we are not leaving only to return to the jurisdiction of the European Court of Justice.”[3]

The pound experienced a large selloff following the remarks, including a brief 6% flash crash in a matter of minutes on the morning of October 7.[4]

Investors’ shift from optimism to pessimism suggests they are more concerned with the impact of Brexit than they are with the BOE’s ability to keep the economy moving in the right direction. Following the BOE’s August policy announcement, companies have sold approximately £4 billion of bonds maturing 20 years or more, according to Bloomberg. That’s almost double the amount for the first seven months of the year.

Since May’s speech, the yield on 10-year UK government notes has surged to roughly 1.08% from 0.75% on September 30.

“Brexit was parked in September as not a problem for now,” said Ben Bennett of London-based Legal & General Investment Management, as quoted by Bloomberg. “Then, all of a sudden, we had the Conservative Party conference and it came back to the forefront of investors’ minds.”[5]

The BOE has also warned markets to expect higher inflation because of sterling’s massive drop. In fact, the consumer price index is expected to overshoot the central bank’s 2% target, something policymakers are prepared to deal with as economic growth remains top priority.[6]

The British economy has performed surprisingly well in the lead up to Brexit and in its immediate aftermath. Gross domestic product (GDP) rose 0.5% in the third quarter, following a 0.7% advance in April-June, the Office for National Statistics reported last week. Economists forecast an increase of just 0.3%.

Compared to a year ago, GDP growth was 2.3%.

The speed at which the British pound has dropped has surprised many investors. Reactions to the mass devaluation may continue for the foreseeable future as markets assess the blowback from Brexit.

The UK government intends to formally notify Brussels of its intent to leave the EU by the end of March.

[1] Joe Mayes (October 24, 2016). “BOE Optimism Wilts in Long-Term Debt as Brexit Sparks Rout.” Bloomberg.

[2] Emily Cadman (August 4, 2016). “BoE launches huge stimulus to mitigate Brexit damage.” Financial Times.

[3] Joe Watts (October 2, 2016). “Theresa May indicates ‘hard Brexit” and dismisses free movement deal to keep single market access.” The Independent.

[4] Jethro Mullen (October 7, 2016). “U.K. pound plunges more than 6% in mysterious flash crash.” CNN Money.

[5] Joe Mayes (October 24, 2016). “BOE Optimism Wilts in Long-Term Debt as Brexit Sparks Rout.” Bloomberg.

[6] Lucy Meakin and Scott Hamilton (October 14, 2016). “Carnet Will Allow Inflation Overshoot as Growth Prioritized.” Bloomberg.