Drop in gilt yields reflects more than safe-haven demand

The further rally in UK government bonds over the last month – resulting in yields reaching new record lows – has mainly reflected an increase in global demand for safe-havens in the wake of the further intensification of the euro-zone debt crisis. But gilt yields have fallen by more than yields on other safe-haven sovereign debt, suggesting that UK-specific factors have also played a role. In particular, the weakness of the recent activity indicators has strengthened expectations that the Monetary Policy Committee (MPC) will soon announce further gilt purchases. We continue to think that more QE is likely to be announced very soon, helping to keep gilt yields anchored at their extremely low levels for some time to come. (For more on our markets forecasts, please see our latest UK Markets Analyst, sent to clients on 1st June.)