Gilt yields defy strong economic news

Despite further signs that the UK’s economic recovery has remained strong, gilt yields have continued to fall over the last month. Indeed, the 10-year gilt yield recently touched a six-month low. Their fall seems to have been partly linked to the decline in US Treasury yields which followed Fed Chair Yellen’s dovish speech at the end of March. But UK-specific factors too, such as the recent easing of inflation and the government’s continued commitment to austerity in last month’s Budget, may have also pushed gilt yields down. Although yields may rise again soon, we continue to expect any increase to be gradual. With inflation set to fall further this year, the MPC looks likely to leave interest rates on hold for longer, and then raise them more slowly, than markets currently expect.