Gilt yields fall in May

UK Fixed Income

As the debate surrounding the UK’s future membership of the European Union (EU) intensified, gilt prices rose during May and yields fell. The yield on the benchmark ten-year UK gilt ended May at 1.56% , compared with 1.73% at the end of April. Meanwhile, the shorter-dated UK gilt yield fell over the month from 0.52% to 0.43% . However, sterling fell over the month against the US dollar.

According to the Bank of England (BoE) , economic expansion is predicted to lose some momentum during the second quarter of 2016 and then to rebound during the second half of the year. The rate of inflation is expected to reach 0.9% in September; nevertheless, this forecast is contingent on the UK remaining in the EU. Inflation is forecast to reach its 2% target by the middle of 2018. The UK’s annualised rate of inflation fell from 0.5% in March to 0.3% in April, registering its first decline since September 2015. Growth in the Consumer Prices Index was dampened by lower costs for air fares, clothing, vehicles, and social housing rents.

The Confederation of British Industry (CBI) downgraded its forecasts for economic growth in the UK from 2.3% to 2% in 2016, and from 2.1% to 2% in 2017. The CBI expects growth to be driven by household spending and investment; however, headwinds are likely to be created by a deteriorating global economic outlook, and the CBI warned that uncertainties – including the uncertainty surrounding the outcome of the impending EU referendum – were “chilling some firms’ plans to invest”.

The UK manufacturing sector contracted for the first time since March 2013 during April, according to the Markit/CIPS Purchasing Managers’ Index (PMI) . The decline was caused by deteriorating domestic demand and a drop in new business from overseas, combined with uncertainties surrounding the EU referendum. Markit warned that the decline in manufacturing production was likely to “act as a drag on the economy” during the second quarter, placing renewed pressure on the services sector to prop up economic growth.

The rate of unemployment remained unchanged at 5.1% during the first three months of 2016. Average earnings (excluding bonuses) rose by 2.1% year on year during the period. The Chartered Institute of Personnel and Development (CIPD) warned that wage growth is likely to “remain stuck in the slow lane” for the next few years.