As recently as the last week in May, global markets were feeling pretty good. The U.S. Federal Reserve was signaling that the economy was strong enough for a rate hike and the Brits favoring Brexit – a vote to leave the European Union – seemed destined for disappointment. 

Then we had a horrible jobs report in the first week in June and from out of nowhere it seemed like the Brexit camp gained a decent upper hand. Now, they have momentum leading up to the referendum taking place next week. These are both developments the market did not want to see.

The result is a full-on, risk-averse flight to safety that has spawned history-making headlines in the global bond marke ts. The biggest of these is the fact that German 10-year government debt went into negative territory for the first time in history. 

That was less a true market movement than just a fascination with seeing a minus sign, however.

The more striking numbers were in other European countries. U.K. government debt, known as gilts, dropped from yields of 1.60 percent in early April to near 1.10 percent now – a plunge of 50 basis points not seen since December 2014. And even U.S. 10-year Treasury bond yields are at lows not seen since 2012.

Getting deeper into “Twilight Zone” territory has been market reaction to Italy, Portugal and Spain. Spreads on credit default swaps have been rising at the same time that those government bond yields were falling to lows not seen since March of last year. What this means, in essence, is that while markets are saying there is a greater chance of those countries’ defaulting on their government bonds, people are paying more and more to own them.

Part of the reason for this is the European Central Bank, which is buying significant amounts of those bonds. But investors are also buying in large quantities in search of any yield they can find.

My View: On our side of the pond it is hard to fathom the extent to which the E.U. referendum in Britain is a defining moment. It is being taken very seriously by the markets. Trading over the next week will hinge pretty much completely on expectations for how that vote will turn out. Needless to say, we already have our topic for Global Perspectives next week. Stay tuned.

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