Expectations of monetary easing, combined with strong demand for safe-haven investments, drove down UK bond yields during July.
However, investors were surprised – and, in some cases, disappointed – by the Bank of England (BoE) policymakers’ unexpected decision to leave UK interest rates unchanged at 0.5% at their July meeting. A cut in rates, accompanied by stimulus measures, had been widely anticipated. UK base rate has not moved since March 2009, and has not been increased for more than nine years. Nevertheless, policymakers are widely expected to implement further monetary easing at their next meeting in early August, and these expectations provided further downward pressure on sterling during the month.
The ten-year UK gilt yield fell from 1.00% at the end of June to 0.80% , while the yield on the shorter-dated UK government bond – which matures in 2018 – remained unchanged between the end of June and the end of July at 0.11% .m Fixed income proved to be the best-selling asset class during June, according to the Investment Association (IA) , experiencing net retail inflows of £258 million. Demand for funds in the £ Corporate Bonds and UK Gilts sectors remained high; in comparison, investors’ appetite for funds in the £ High Yield and UK Index-Linked Gilts sectors experienced a sharp decline.
The BoE warned that some firms have delayed hiring and investment plans, and expects to see “significant weakening” in the UK housing market and “sizeable falls” in commercial real estate prices. The BoE believes that the UK economy expanded more strongly than expected during the second quarter of 2016 and raised their growth forecast to 0.5%; however, policymakers expect economic activity to deteriorate in the short term.
Mortgage approvals fell to their lowest level since May 2015 during June, dampened by uncertainties over the referendum and by an increase in tax on buy-to-let properties. Sentiment in the UK’s residential property market deteriorated in June, according to a survey undertaken by Royal Institution of Chartered Surveyors (Rics) after the referendum, and house prices are predicted to decline over the next few months. Demand for houses reached its lowest level for since mid-2008 and supply also fell steeply. Looking ahead, although Rics expects the dip in activity to continue over coming months, the key issue is how the economy performs amid the uncertainty caused by the vote to leave the EU.