The recent fall in gilt yields has reflected a combination of weak news on the UK economy, a renewed rise in safe-haven demand in response to the crisis in Cyprus and a slight building of hopes of more QE. Any concerns that February’s debt downgrade would trigger a run on gilts look to have been severely misplaced. We still think there is scope for gilt yields to fall a little further as safe-haven demand continues to build, the MPC restarts its asset purchase programme and markets’ expectations for a very prolonged period of above target inflation are disappointed.
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