Are gilts priced for a slowdown?

On the face of it, the steady fall in gilt yields this year suggests that markets might be expecting the economic recovery to lose some momentum soon or that safe-haven demand from overseas might have pushed them lower.

However, the fall in yields seems to have largely reflected growing expectations that interest rates will not return to the levels seen before the financial crisis in the long term, rather than concerns about the recovery’s near-term strength or safe-haven flows. Given the market’s long-term focus, we doubt that further momentum in the recovery will prompt a sudden upward correction in yields.