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Gilt yields tumble in October

October 2018

Turmoil in global financial markets and sharp losses in equity markets drove up demand for gilts during October, leading to a decline in gilt yields. The yield on the benchmark government bond dropped from 1.46% to 1.26% during the month. The Budget presented a stronger-than-expected outlook for the UK economy and Government borrowing.

  • Gilt issuance is set to fall to its lowest level since 2007-08
  • S&P affirmed its “AA” rating and “negative” outlook for the UK
  • The UK economy grew by 0.7% in the three months to August

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Turmoil in global financial markets and sharp losses in equity markets drove up demand for gilts during October, leading to a decline in gilt yields. The yield on the benchmark government bond dropped from 1.46% to 1.26% during October, while the yield on the short-dated gilt – which matures in 2021 – fell from 0.88% to 0.73%.

“The Budget presented a stronger-than-expected outlook”

The Budget presented a stronger-than-expected outlook for the UK economy and Government borrowing. Public sector net borrowing for the current fiscal year was cut to £25.5 billion and, after rising next year, it is forecast to decline to £19.8 billion in 2023-24, reaching its lowest level in over 20 years. As a result, gilt issuance is scheduled to drop below £100 billion for the first time since 2007-08, according to the Debt Management Office (DMO); better-than-expected borrowing forecasts resulted in an £8.5 billion cut to planned gilt sales, reducing total issuance in the current year to £97.5 billion. 

Credit ratings agency Standard & Poor’s (S&P) affirmed the UK’s credit rating at “AA”, but retained its “negative” outlook. While acknowledging the UK’s key credit attributes – high levels of average income, a diversified economy, strong institutions, and sterling’s reserve-currency status – S&P also highlighted the risks posed by Brexit-related uncertainties. Looking ahead, S&P warned that a “disorderly” Brexit scenario could place the UK’s current credit rating in jeopardy. 

The UK economy grew by 0.7% during the three months to August. Meanwhile, the annualised rate of consumer price inflation fell from 2.7% in August – its highest level since April – to 2.4% in September. Higher prices for gas and electricity were not enough to offset a drop in the price of food and non-alcoholic drinks. In comparison, average earnings (excluding bonuses) rose by 3.1% year on year in the three months to August, representing their strongest increase since the three months to January 2009.

Retail sales volumes fell at a monthly rate of 0.8% during September, according to the Office for National Statistics (ONS), dragged down by a “stark” 1.5% decline in sales of food, representing the largest drop in food store sales for three years. According to the British Retail Consortium (BRC), confidence amongst shoppers has deteriorated, and the proportion of those expecting to be better off over the year ahead has waned from 26% in July to 22% in September.


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