UK Bond Market Review

7th August, 2020
The yield on the ten-year gilt eased from 0.19% at the end of May to 0.17% at the end of June. However, it spiked above 0.35% early in the month.
As expected, the BoE did announce a further £100 billion-worth of quantitative easing to combat the economic impact of the coronavirus pandemic. Members of the BoE’s Monetary Policy Committee (MPC) voted by eight to one in favour of expanding its programme of asset purchases to £745 billion. However, the Debt Management Office (DMO) warned that government borrowing costs were likely to increase once the BoE begins to unwind its quantitative easing measures.

The Government raised £2.25 billion by issuing Gilts, maturing in 2041. They were sold with an average yield of 0.596%. Almost as low as a 20-year tranche issued in May at a record low of 0.594%.

The BoE reported signs of a revival in activity in the housing market and consumer spending but warned that outlook depended on the pandemic’s evolution. BoE Governor Andrew Bailey commented: “We’re still living in very unusual times … Even with the relaxation of some COVID-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist. The economy, and especially the labour market, will, therefore, take some time to recover towards its previous path.”

The Governor also confirmed that the central bank is assessing the possibility of using negative interest rates. Still, he emphasised that this would merely constitute an expansion to the tools in its “toolbox”, and was not under immediate consideration.

The UK manufacturing sector continued its decline in May, according to IHS Markit/CIPS, although the rate of contraction moderated. Nevertheless, the sector is in a deep downturn, undermined by weak demand and disruptions to supply chains; looking ahead, it remains vulnerable to ongoing uncertainties including COVID-19 and Brexit. Over the second quarter, manufacturing output fell at its fastest rate on record, according to the Confederation of British Industry (CBI), dragged down by substantial declines amongst the automotive, mechanical engineering and metal products sectors. Export orders dropped to an all-time low.

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