THE departure of Britain from the EU affects a lot more than the London markets. It has driven a risk-off reaction in the European bond markets, which were the focus of concern during the crisis of 2011-2012. In the aftermath of the shock result, the German 10-year bond yields fell to a record low of minus 0.15%, according to Jim Leaviss of M&G, the fund management group. Although yields have bounced back to 0.09%, this is still an 18 basis point fall on the day. But Italian, Spanish, Portuguese and Greek bond yields have all risen on the news. As a result the spread between Italian/Spanish and German bond yields has widened by a quarter of a point; Portugal has widened over Germany by almost a third; and Greek yields by more than a point.

Why was this? The British news raised questions about the stability of the euro zone and about the electoral appeal of populist movements such as the one that delivered a Brexit vote. That will be bad news for Mario Draghi, the ECB president, who is widely credited with seeing off the worst of the euro crisis.

In Britain itself, 10-year gilt yields have fallen by more than a quarter of...Continue reading