The downgrade of US sovereign debt and speculation that France might be next has prompted renewed questions over the UK’s own credit standing. While a UK downgrade is not an imminent threat, it is certainly a possibility further ahead if, as we expect, the weak economy results in a disappointingly slow rate of fiscal improvement. But a modest downgrade to UK debt is unlikely to prompt a wholesale flight out of sterling assets. Indeed, the bond market’s natural instincts will be to focus instead on the implications of weak growth for inflation and monetary policy, with bond yields remaining very low as a result.
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