We continue to expect 10 year gilt yields to drop to around 2.5% and to remain at those sorts of levels for a prolonged period. While breakeven inflation rates have crept a little higher in response to uncertainty surrounding the inflationary implications of quantitative easing, a sustained rise in inflation expectations seems unlikely given ample spare capacity in the economy and a fractured monetary transmission mechanism. Meanwhile, real yields should remain low against a background of very low official rates, weak real economic growth and further significant bond purchases.
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