Gilt yields stay low as QE3 begins

UK government bond yields and equity prices have diverged over the last month. The Monetary Policy Committee’s (MPC’s) decision to resume quantitative easing (QE) appears to explain their decoupling. Previous tranches of QE have helped simultaneously to lower gilt yields, and, by encouraging investors to rebalance their portfolios, boost equity prices. So the MPC may take some comfort from signs that QE3 is working. Nonetheless, if past experience is anything to go by, the boost to equity prices from QE may prove to be short-lived.