Over the past month, UK equities have continued to recover, while corporate bond spreads have narrowed, bolstered by the general improvement in sentiment in global markets after the turmoil around the start of the year. Nonetheless, despite this improvement, markets’ worries about the UK haven’t gone away just yet. Indeed, the trade-weighted sterling index has continued to slide, with the pound down against every currency in the trade-weighted basket, partly reflecting fears over the possible impact of a Brexit. In addition, market expectations for the timing of the first hike in Bank Rate have moved back to 2020, which has helped to drive down gilt yields. While concerns over the record size of the UK’s current account deficit could keep sterling under pressure regardless of the outcome of the EU referendum in June, we expect interest rates to rise far sooner than markets currently anticipate (starting in November 2016), which ought to push gilt yields up.
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