LONDON (Reuters) - Investors may soon be paying for the privilege of lending to the British government for as long as ten years, according to a form of technical analysis known as Elliot Wave.
Daniel Loughney, a portfolio manager at AllianceBernstein, has used this model to predict that Britain's 10-year bond yield could fall below zero by 2018 - as has happened in Japan and Germany where central banks have used unprecedented monetary stimulus to prop up economies.
This is not a consensus view.
With inflation expected to spike as a result of the sharp depreciation of the pound since last June's Brexit vote, markets are priced for the Bank of England to raise interest rates over the next two years.
Economists polled by Reuters expect Britain's 10-year bond yield, currently around 1.30 percent GB10YT=TWEB, to rise to 1.60 percent by the end of 2017, while some predict it may reach as high as 2.10 percent. reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/mm-bondyield-polls?s=6J&st=G
"There is an endemic bias in markets that always wants to think that yields are going up and the economy will do well," said Loughney.
"I try with technicals to disassociate with all of the economic data and from this perspective there is a very good chance yields will fall below previous lows and potentially into negative territory in the U.K."
While AllianceBernstein predicts British 10-year yields will remain around current levels over the next year, the fund is slightly overweight the debt because of the technical outlook.
Loughney's calculations are based on the Elliot Wave theory of market psychology which assumes historical price trends known as 'waves' follow set rules and can predict future movements. In a five-way wave count such as Loughney's, waves one, three and five show the trend, while two and four are corrective phases.
Based on his analysis of price moves since 2008, Loughney said yields could fall to between 0.7 percent and minus 0.1 percent by end-2018. Based on a longer-term pattern dating to 1990, he says they could drop as low as minus 0.9 percent.
Loughney said he used the same theory to predict German bond yields would fall into negative territory a couple of years before it happened in June 2016.
Editing by Ruth Pitchford