Supported by a cut in base rates, the relaunch of QE and portents of doom, the UK gilt market saw prices surge after the UK voted to leave the EU. With doom avoided and the promise of a more expansionary setting for US fiscal policy, bond markets – the UK included – spent the winter on the back foot; ultra-long nominal gilts actually saw their prices ease back to Brexit levels. No more, the bid for Gilts is back – especially in index-linked where prices are less than 5% off their all-time high.
Gilt prices don’t have to look far to find support – the explosions in Russia, the French elections, the lack of validation for the array of buoyant sentiment measures from the real economy and the credit-rating downgrade perhaps of South Africa. There are always things to worry about but none of those mentioned seem to be on a par with pessimism implicit in 10-year gilt yields being virtually 1% (and 50 years at 1.5%). Evidence – if it were needed, the institutional bid for gilts remains very strong (and/or belief in the disinflationary thesis remains).
The recent rise in inflation, if sustained, has the potential to knock the market but a long-term RPI rate of 3.3% is already discounted and that is more than 0.5% higher than the average of the past 25 years. Perhaps the best hope for the gilt bears is that Trump starts to get his own way.
Scott Jamieson, Head of Kames Capital’s Multi-asset team