Sell-off in gilts abates

The sell-off in gilts, which saw the 10-year yield rise from 1.2% at the end of 2017 to a peak of close to 1.7% by mid-February has abated. The benchmark yield is now back around 1.5%. Indeed, the economic data has disappointed over the past month or so, and, following the release of the Treasury’s Debt Management Report alongside the Spring Statement, we know that future gilt issuance will be more limited than was previously expected. But we doubt the upward trend in gilt yields that we saw at the beginning of the year will remain on ice for too long. Survey evidence of more robust wage growth is filtering through to the hard data. And with CPI inflation starting to ease, that should allow household spending to find its feet and underpin some rebound in GDP growth. Against this backdrop, we think that the MPC will deliver a hike in May before raising rates again in both August and November, to leave Bank Rate at 1.25% at year-end. By contrast, the market isn’t fully pricing a rise in Bank Rate to 1% until mid-2019. As a result, we expect the 10-year gilt yield to rise to 2% by the end of the year.