UK bond market review: Gilt yields declined in July

July 2017

Gilt yields fell over July as a whole, dampened by an unexpected drop in the UK’s annualised rate of inflation. Having hit its highest level in almost four years during May, the consumer price index fell from 2.9% to 2.6% in June. The UK economy posted quarter-on-quarter growth of 0.3% during the second quarter. The IMF downgraded its forecast for UK economic growth in 2017 from 2% to 1.7%.

  • UK house prices notched up their first monthly decline since January during June
  • Demand for gilts fell amongst overseas investors during June
  • Moody’s warned that a disorderly Brexit could lead to “significant” macroeconomic disruption in the UK

To view the series of market updates looking at the markets through July, click here


Gilt yields fell over July as a whole, dampened by an unexpected drop in the UK’s annualised rate of inflation. Having reached its highest level in almost four years during May, the consumer price index fell from 2.9% to 2.6% in June. The ten-year gilt yield eased from 1.33% to 1.29% during July, while the short-dated gilt yield fell from 0.37% to 0.27%. According to Bank of England (BoE) data, foreign investors bought only £1.1 billion-worth of gilts during June, compared with a total of £8.38 billion in May.

“The UK finally acknowledged that Brexit will result in a financial cost to the UK”

During July, the UK finally acknowledged that Brexit will result in a financial cost to the UK, admitting that “the UK has obligations to the EU”. Credit ratings agency Moody’s warned that the UK remains vulnerable to “significant” macroeconomic disruption – including slower growth or recession and an increase in unemployment and inflation – if the UK and the EU are unable to reach a Brexit agreement. In turn, this disruption could put significant pressure on the credit quality of many UK issuers. Although the impact would differ from one sector to the next, Moody’s believes that companies using “just-in-time” supply chains are likely to be particularly adversely affected by an increase in border inspections.

UK house prices posted their first month-on-month decline since January during June, falling by 1%, according to mortgage lender Halifax. Annualised house-price growth fell from 3.3% in May to 2.6% in June, notching up its weakest growth since May 2013. Halifax cited mounting pressure on household finances as wage growth continues to lag the rising cost of living, alongside additional stamp duty charges on the purchase of buy-to-let properties and second homes. Elsewhere, HM Revenue & Customs (HMRC) reported that the number of residential property transactions dropped for a third consecutive month in June, posting their lowest total since October 2016.

The UK economy posted quarter-on-quarter growth of 0.3% between April and June, compared with first-quarter growth of 0.2%. The International Monetary Fund (IMF) downgraded its forecast for UK economic growth in 2017 from 2% to 1.7%, dampened by “weaker-than-expected activity” in the first quarter. Productivity fell by 0.5% during the first quarter of 2017, posting its first quarter-on-quarter decline since the end of 2015. Meanwhile, the UK’s industrial output posted a monthly decline of 0.1% in May and activity in the construction sector dropped by 1.2%.


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