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Concerns over gilt supplies

March 2018

UK gilt yields fell over March as a whole amid concerns over future supply as the DMO announced it would reduce gilt issuance in 2018/19 to its lowest level since 2007/2008. Meanwhile, the pound rose to its highest level against the US dollar since the start of February, boosted by growing optimism over Brexit negotiations and expectations of monetary tightening.

  • The rate of inflation eased to 2.7% in February
  • Interest rates remained unchanged in April
  • The UK’s economic growth in 2018 is expected to lag that of other major economies

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UK gilt yields fell over March as a whole amid concerns that future supply will not meet demand. Meanwhile, the pound rose to its highest level against the US dollar since the start of February, boosted by growing optimism over Brexit negotiations and expectations of monetary tightening. During March, the yield on the benchmark UK government bond declined from 1.59% to 1.39%. In comparison, the yield on the short-dated gilt – which matures in 2020 – edged down from 0.83% to 0.82%. Looking ahead, demand for gilts is likely to be supported by the Debt Management Office’s (DMO’s) decision to reduce gilt issuance to £102.9 billion in 2018/19, representing its lowest level since 2007/08.

“Demand for gilts is likely to be supported by the DMO’s decision to reduce gilt issuance”

Bank of England (BoE) policymakers left base rate unchanged at their March meeting. Unlike February’s meeting, however, the vote was not unanimous, with two of the nine members of the Monetary Policy Committee (MPC) voting for an increase of one-quarter of a percentage point. 

The UK’s annualised rate of inflation, as measured by the Consumer Prices Index, eased from 3% to 2.7% during February, reaching its lowest level since July 2017, dampened by lower prices for motor fuels and food. Average earnings (excluding bonuses) rose at an annualised rate of 2.6% between November and January, compared with a rise of 2.5% year on year in the previous three-month period. The news stoked speculation that BoE policymakers will raise interest rates at their May meeting. 

The outlook for the UK’s economic growth appears to have brightened, according to the Chancellor of the Exchequer’s Spring Statement, which included an upgraded forecast for economic expansion in 2018. Nevertheless, the UK’s projected growth of 1.5% remains below forecasts for many other leading economies. The Organisation for Economic Co-operation & Development (OECD) expects the UK’s economy to grow by 1.3% this year – the lowest growth rate of any country in the G20 – citing the impact of rising inflationary pressures on consumers’ disposable income, and the effect of softening business investment caused by Brexit-related uncertainties. The OECD predicts expansion of 1.1% in 2019. In contrast, the OECD believes the global economy will expand at its strongest rate since 2011, forecasting annual growth of 3.9% in 2018 and 2019, although growth might be dampened by rising levels of protectionism that could affect confidence, investment and employment.


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