The continued drop in gilt yields over the last month has partly reflected the further fall in interest rate expectations as a result of the weakness of data on the UK economy. But the fall in gilt yields has exceeded the drop in rate expectations, suggesting that other factors have also driven their fall. One possible explanation is that gilts have benefited from safe-haven demand resulting from the intensification of the sovereign debt crisis in the euro-zone. But the gilt market may also be factoring in the possibility that more monetary stimulus is on the way in the not-too-distant future.
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