Markets underestimating chances of more stimulus

UK asset prices have been undermined by fading expectations of more monetary stimulus and the partial reversal of safe-haven demand as euro-zone concerns have eased. Although a cut in official interest rates now seems unlikely, we continue to expect the MPC to press on with more asset purchases next year. And safe-haven demand for UK assets is likely to increase as the euro-zone’s debt crisis re-intensifies in 2013. In our view then, the rally in UK government bonds is far from over. Indeed, we still think that gilt yields will return to their record lows seen earlier this year.