UK bond market review: Gilt yields plummet in August

Gilt yields plunged during August as nervous investors sought the perceived safety of government bonds and gold. While investors remained concerned about the deteriorating outlook for the global economy – particularly in the light of further escalations in the trade conflict between the US and China – UK investors were preoccupied by the increasing possibility of a no-deal Brexit. 

  • The UK economy contracted for the first time since 2012 during Q2
  • CPI rose to 2.1% year on year in July
  • Average earnings rose by 3.9% during Q2

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Gilt yields plunged during August as nervous investors sought the perceived safety of government bonds and gold. Over the month as a whole, the yield on the benchmark UK government bond plummeted from 0.60% to 0.32%. While investors remained concerned about the deteriorating outlook for the global economy – particularly in the light of further escalations in the trade conflict between the US and China – UK investors were preoccupied by the increasing possibility of a no-deal Brexit, following the news that Parliament would be suspended from early September until 14 October. 

“The Bank of England downgraded its growth forecast for the UK economy”

The UK economy posted an unexpected contraction during the second three months of 2019, shrinking at a quarterly rate of 0.2% as output in manufacturing and construction weakened and concerns about a no-deal Brexit intensified. The economy had expanded by 0.5% in the first quarter, boosted by a flurry of pre-Brexit stockpiling in the manufacturing sector ahead of the original 29 March deadline. This was the UK’s economy’s first contraction since 2012, according to the Office for National Statistics (ONS). The British Chambers of Commerce (BCC) warned that – unless “decisive” action was taken – the factors that led to the second-quarter contraction would continue to weigh on the UK’s short-term growth trajectory.

The Bank of England (BoE) downgraded its growth forecast for the UK economy this year and next year, highlighting a “material and broad-based slowdown” in global economic growth since late 2017. The BoE cut its forecast from 1.5% to 1.3% in 2019, and from 1.6% to 1.3% in 2020; however, these predictions assume that the UK leaves the EU with a deal. The BoE predicted that no-deal Brexit would lead to lower economic growth, higher prices, higher levels of volatility, and further weakness in the pound. 

Prices rose more rapidly than expected during July: consumer price inflation rose at an annualised rate of 2.1%, compared with June’s rate of 2%, driven higher by increases in prices for games and toys, hotel accommodation, clothing and footwear. Meanwhile, average earnings (excluding bonuses) rose at an annualised rate of 3.9% during the second quarter of 2019. Nevertheless, according to the ONS, earnings in real terms remain lower than before the financial crisis: the average real weekly wage in June 2019 in real terms was £469, compared with a rate of £473 in April 2008.


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