(Bloomberg) -- It's safety first for investors around the world as they assess the significance of Britain's vote to leave the European Union.
Demand for haven assets sent bond yields to record lows after Federal Reserve Bank of New York President William Dudley said Brexit's significance could escalate if it triggers turmoil in markets beyond the U.K. The yen climbed to its strongest level since June 24, when the results of the British referendum first roiled global markets, and gold jumped to a two-year high, boosting shares of companies that mine precious metals. But that didn't prevent a gauge of global stocks from losing ground for a second day. Sterling touched its lowest level in more than three decades.
"Everyone is trying to react to a situation we've never been in before," said Stewart Richardson, chief investment officer at RMG Wealth Management in London. "We've had shocks to the system before, but we haven't had one like this. And we won't know the answers for a long time."
After rallying last week on bets central banks will work to limit the fallout from Britain's referendum, global equities are retreating again as the knock-on effects become evident. Three asset managers froze withdrawals from U.K. real-estate funds on Tuesday following a flurry of redemptions and the Bank of England relaxed capital requirements for lenders. Societe Generale Chairman Lorenzo Bini Smaghi said a banking crisis in Italy, stoked by the referendum, could spread to the rest of Europe and rules limiting state aid to lenders should be reconsidered.
"Government bond yields are telling you something very nasty is about to happen," said John Anderson, a money manager at Smith & Williamson Investment Management.
The yield on 10-year Treasury notes, the global benchmark for sovereign bonds, fell as much as six basis points to 1.318%. Yields on 10-year government bonds in Australia, Japan, Germany, France and the U.K. also sank to records. The strength of the gains in government bonds is leaving investors to ponder how severe the fallout from Brexit is going to be.
"It's starting to feel like 2008," said John Anderson, a money manager at Smith & Williamson Investment Management in London. "Government bond yields are telling you something very nasty is about to happen. These property fund suspensions are a worry. I am risk-off at the moment, erring on the side of believing the govvies," he said, referring to government debt.
Post-Brexit, many clients may want to sell, but others could see the volatility as a boon.
RISK-OFF ENVIRONMENT
Securities in the Bloomberg Global Developed Sovereign Bond Index, with an average life of about 10 years, yield a record-low 0.40%. In Germany, the 10-year bund yield fell to minus 0.188%, while yields on similar-maturity French and British securities reached 0.118% and 0.724%, respectively.
The Fed is scheduled to release the minutes of its June 14-15 policy meeting on Wednesday and a gauge of U.S. services output is also due, before key payrolls data is released on Friday.
Declining prospects of a Fed rate hike have spurred a torrent of demand for Treasuries, with almost $10 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index yielding less than zero, up from about $9 trillion a week ago. In addition to experimenting with negative rates, some monetary authorities outside the U.S. are buying government debt, reducing the supply for investors who count on fixed-income assets.
"In the risk-off environment produced by international events, there is a global rush to buy super-long sovereign debt, and bonds that still offer some yield are going to be most in demand," said Hideo Suzuki, the chief manager of foreign exchange and financial products trading at Mitsubishi UFJ Trust & Banking in Tokyo.
Borrowing costs for U.K. companies have fallen to a record on investor speculation the Bank of England will boost stimulus to cushion the impact of Brexit. The average yield on sterling-denominated investment-grade bonds has fallen to 2.77% and the relative cost of borrowing in pounds instead of euros narrowed to the least in 10 months, according to the Bank of America Merrill Lynch indexes.
Sweden's central bank pushed a potential tightening deeper into next year and signaled negative interest rates will last for two more years in response to Brexit-fueled fear about economic turmoil.
"Everyone is trying to react to a situation we've never been in before," said Stewart Richardson, chief investment officer at RMG Wealth Management.
RISK AVERSION
The MSCI All-Country World Index dropped 0.7% and the Stoxx Europe 600 Index slid 1.7%, falling for a third day, with all its industry groups declining. Telecom companies and insurers were the biggest losers, while Tullow Oil sank 15% after announcing a $300 million sale of convertible bonds. The Stoxx 600 trades at around 14 times estimated earnings, near its lowest valuation since 2012 relative to the global index.
Deutsche Bank led losses in a gauge of European lenders as BlackRock cut the region's shares to underweight, with a negative view on the euro area's banking sector, amid the Brexit fallout. The Italian market regulator banned short selling on Banca Monte dei Paschi di Siena for Wednesday's session, prompting a rally of 8.6% -- after it slumped 31% in the past two days.
Miners of precious metals Randgold Resources and Fresnillo climbed more than 3.6% as gold and silver gained. Those, in addition to the weak pound, helped support the U.K.'s FTSE 100 Index, which slipped 1.6%.
Futures on the S&P 500 Index expiring in September lost 0.6%, while the MSCI Emerging Market Index dropped 1.4%, falling for a second day. Shares in South Korea slid 1.9% and Taiwan's benchmark slid 1.6%, while stock indexes in South Africa and Poland both fell at least 1.1%. Many markets across Asia and the Middle East were closed for religious holidays.
The pound sank to a fresh 31-year low of $1.2798 before climbing back toward $1.30.
The yen jumped 1.1% to 100.65 per dollar, taking its advance since Britain's referendum to more than 5%.
"The yen is taking the brunt of the pound selling," said Takuya Kawabata, an analyst at Gaitame.com in Tokyo. "It's a risk-off market triggered by the pound. We need to continue to remain wary of risk aversion prompted by the U.K."
