Gilt yields grind lower despite UK economy’s momentum

Gilt yields have continued to decline over the last month even though the UK’s economic recovery has maintained its healthy pace and overseas residents have been net sellers of gilts this year. The fall in yields seems to have partly reflected a fall in inflation expectations in response to the recent weakness of both commodity prices and domestic price pressures, which markets have concluded may now enable the MPC to leave Bank Rate on hold until next summer. It may also be that the “term premium” in gilts has declined, reflecting the low levels of market volatility and strong safe-haven demand. That said, we doubt that gilt yields can remain on a downward trajectory – even the onset of very gradual rises in Bank Rate from next year implies that yields are likely to ascend again soon.