Gilt yields set to remain very low for a long while yet

The prospect of a further prolonged period of ultra-loose monetary policy suggests that government bond yields are set to remain markedly low for a long time yet. Admittedly, we think Treasury yields will rise as the US Fed tightens policy sooner and by more than the markets are pricing in. Meanwhile, any loosening in fiscal policy at the Autumn Statement could raise concerns about the sustainability of the public finances. And rising inflation will push up the inflation expectations component of nominal bond yields. However, we think that the Bank of England will cut rates again in November, from 0.25% to 0.10%. What’s more, ongoing purchases of gilts as part of the Bank’s QE programme should help to keep yields low and an expansion of the asset purchases would probably occur if the economy slows more than the Bank anticipates.