June 2018
June proved to be another uneven month for UK government bonds. Investor sentiment was at the mercy of macroeconomic factors, from US President Donald Trump’s introduction of punitive trade tariffs and concerns over the political situation in Italy and Germany, to the unresolved issue of Brexit and rising speculation that the BoE is poised to increase base rate.
- The MPC maintained base rate at 0.5%
- CPI inflation remained at 2.4% YoY in May
- The IA published a series of “best practice” principles for the bond market
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June proved to be another uneven month for UK government bonds. Investor sentiment was at the mercy of macroeconomic factors, from US President Donald Trump’s introduction of punitive trade tariffs and concerns over the political situation in Italy and Germany, to the unresolved issue of Brexit and rising speculation that the Bank of England (BoE) is poised to increase base rate
“The MPC believes that the UK’s economy is likely to gain momentum”
The BoE’s Monetary Policy Committee (MPC) maintained its key interest rate at 0.5% at its June meeting; however, the news that three of the nine members of the Committee had voted for an increase stoked expectations of higher rates at the MPC’s August meeting. Short-dated gilt yields were sent higher by the news: the yield on the short-dated gilt – which matures in 2020 – climbed from 0.61% to 0.71%, having begun the year at 0.48%.
The MPC believes that the UK’s economy is likely to gain momentum after a lacklustre start to the year, underpinned by “solid” employment growth. The country’s economy grew more strongly than previously calculated during the first three months of 2018, according to the latest data from the Office for National Statistics (ONS). The economy expanded at a quarterly rate of 0.2% rather than 0.1% during the period, boosted by a greater contribution from the construction sector. However, the UK’s economic growth for the whole of 2017 was revised down by the ONS from 1.8% to 1.7%, representing the weakest annual growth since 2012, when the economy expanded by 1.4%.
During June, the yield on the ten-year government bond rose from 1.28% to 1.31%, only slightly higher than the level of 1.23% with which it began 2018. Over the first half of the year, the ten-year gilt yield has risen above 1.65% and fallen below 1.20%.
Having fallen from 2.5% to 2.4% in April, the annualised rate of consumer price inflation remained unchanged at 2.4% in May, supported by an increase in the oil price. The labour market remained strong – the rate of unemployment was 4.2%, the joint-lowest since 1975 – but the rate of average wage growth (excluding bonuses) eased from 2.9% to 2.8% over the three months to March.
The Investment Association (IA) published a range of “best practice” principles in June. These are intended to increase transparency and enhance the functioning of the bond market during exchange and tender offers.
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