Brexit worries fuel demand for gilts

Amid rising speculation over the likelihood of a no-deal Brexit, gilt prices surged and yields plummeted in May as investors scrambled for investments perceived to be safe havens. Nervousness in financial markets was exacerbated by concerns over the sudden escalation in trade tensions between China and the US.

  • UK economic growth picked up in Q1
  • The risk of a “no deal” Brexit has increased
  • CPI inflation rose to 2.1% in April

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Amid rising speculation over the likelihood of a no-deal Brexit, gilt prices surged and yields plummeted in May as investors scrambled for investments perceived to be safe havens. Nervousness in financial markets was exacerbated by concerns over the sudden escalation in trade tensions between China and the US. During May, the yield on the benchmark gilt fell to its lowest level since 2016; over the month as a whole, the yield on the benchmark UK government bond dropped from 1.12% to 0.87%, and the yield on the short-dated gilt declined from 0.74% to 0.62%.

“The yield on the benchmark gilt fell to its lowest level since 2016”

Uncertainties over the possibility of reaching any Brexit deal were exacerbated by the European Parliamentary elections, in which the pro-leave Brexit Party received 32% of the UK vote, followed by the pro-remain Liberal Democrats on 20%. With the future of any Brexit deal appearing to hang in the balance, Mrs May called for compromise, saying: “A consensus can only be reached if those on all sides of the debate are willing to compromise”. 

The risk of “no deal” has increased, according to credit ratings agency Fitch. Looking ahead, Fitch believes that the UK’s next Prime Minister will “face the same challenge of overcoming the lack of consensus in the UK Parliament … (and) how this deadlock will be broken remains unclear”. 

UK economic growth picked up from 0.2% in the final three months of 2018 to 0.5% in the first quarter of 2019. Growth was boosted by a stronger contribution from the manufacturing sector, which posted its fastest rate of expansion since 1988, driven by Brexit-related inventory building. 

In its Quarterly Inflation Report, the Bank of England (BoE) upgraded its forecast for UK economic growth in 2019 from 1.2% to 1.5%, citing signs that global growth is showing signs of stabilising. If the UK economy performs in line with the central bank’s expectations, policymakers may consider raising interest rates more quickly than previously expected, according to BoE Governor Mark Carney; however, the BoE’s forecasts assume a smooth Brexit transition, which now looks questionable. 

The annualised rate of consumer price inflation rose above the BoE’s 2% target during April, increasing from 1.9% in March to 2.1%, its highest level since December 2018. Inflation was driven up by higher energy bills following a change to Ofgem’s price cap on gas and electricity prices.


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