May Delays Brexit Vote in Move to Get EU to Tweak Deal: Yield Curve On Fire
EU Response - For Now
Theresa May delayed the Brexit vote today in a clear attempt to buy more time for her piss poor deal. The EU response, for now is the EU won't change the deal.
I suspect they will. Enough to matter? I don't know. The mess is quite complicated.
EU Throws May a Lifeline
Earlier this morning I noted EU Throws Theresa May a Poisoned Lifeline: Court Rules the UK Can Cancel Brexit!
That opened up a huge number of possibilities.
- If the margin of defeat is slim, May will request a few tweaks from the EU and put it to vote again. It would pass the second time.
- May could resign.
- May could threaten to resign in an attempt to force Tories to vote for the deal or risk losing an election to Labour.
- Tories could stage a leadership challenge vote of no confidence (Only Tories vote). May would be replaced by a Tory vote.
- Parliament could stage a vote of no confidence (All parliament votes). If May failed, there would be new elections.
- May could threaten another referendum. Depending on the precise wording of the referendum, the EU might agree to go along with it.
- May could ask the EU for more time to work out a better deal.
- May could decide to do what she said all along: No deal is better than a bad deal.
- May could decide to request extension after extension until it appears a vote will go the way she wants.
- May or a new government might ask for another referendum.
I commented that I do not know how to handicap this, and I rather doubt anyone else does either. I still don't, but I can say May has chosen option 7.
UK Bonds Yields Crash
Yield on UK 30-year bond came crashing down today as Theresa May Delays Brexit Vote.
“The yield curve is now on fire,” said John Wraith, head of U.K. macro rates at UBS Group AG. “The market clearly believes she will not get anything material enough from the EU to turn that scale of opposition around, so even if the vote is delayed it’s going to end in the same way -- with a big defeat for the government.”
Thirty-year bond yields fell 17 basis points to 1.66 percent, the most since June 24, 2016, the day after the Brexit referendum. Those on 10-year bonds dropped 10 basis points to 1.16 percent, the lowest level since May.
Traders in money markets are now betting that the next interest-rate increase from the Bank of England will not happen until late 2020. The gap between two- and 10-year bonds narrowed three basis points to 49 basis points, the lowest level since July. That spread has been narrowing in the U.S., where inversions have been a historical indicator on recessions.
Despite Tusk's response, I suspect the EU will offer some tweaks, but perhaps not until a first vote fails.
May tried to force a binary option: Hard Brexit or a deal. The ECJ threw May another lifeline and that opens up possibilities.
The best option for the UK now was the best option all along: Hard Brexit. There is nothing to fear. The UK and the EU both have a lot to lose if temporary measures to facilitate trade are not put in place.
In the case of a hard Brexit, I fully expect both sides to cooperate far more than they have up to this point.
Mike "Mish" Shedlock