Gilt complex shows how terrifying Brexit is

At last there are clear signs that the UK’s impending decision on Brexit is having a real effect on the world’s largest financial market — that of US Treasury bonds, which is worth all of $500 billion (£347 billion) a day.

The spread between UK gilt and US Treasury yields is at it widest this century.

Looking at similar two-year dated bonds — those that best illustrate investors’ attitude to short-term risk — US bonds yield 0.89% whereas the equivalent gilt yields just 0.37%.

That is a premium in favour of the Yanks of 52 basis points — a level which has not been seen since 1999.

The economic fundamentals do not warrant this huge gap. Only this week, the Organisation for Economic Co-operation and Development cut its forecasts for US growth from 2% to 1.8% and the UK’s from 2.1% to 1.7%. There’s not much difference there.

But that’s the long-term story. For now, the mood of investors worldwide is increasingly dominated by the EU referendum.

It is actually demand for the security of UK gilts by domestic and international investors in this country that has driven their prices higher and yields lower as we enter the final three weeks of the campaign.

At the same time, the Federal Reserve has started publicly acknowledging the importance of the decision we will make on June 23. Fed governor Daniel Tarullo last night added his voice to that of fellow governor Jerome Powell, stating that Brexit would be a factor he would consider at the next rate-setting meeting on June 14 and 15.

Tonight we will hear from the third of the five governors, Lael Brainard, and on Monday Fed chairman Janet Yellen will give her final thoughts ahead of the meeting. The market says the expected rate rise this month has now been shifted to July and after the Brexit vote.

That’s not because the US economy is picking up less quickly than the Fed thought so it can ease off. It’s because the Fed recognises the scale of the toxic and systemic shock that a Leave vote will have not just on the UK or even Europe but on the global economy.