Gilt yields won’t rise much further

The recent rise in gilt yields has fully reversed the falls seen after the EU referendum. Although they have followed Treasury yields up following Trump’s election victory, this is not the whole story. The fall in sterling – as a result of growing expectations of a "hard Brexit" – has raised inflation expectations. And the economy has held up better than most expected in the wake of the Brexit vote, leading to a rise in the real component of yields. Given our expectation that the Chancellor will easeback on the fiscal squeeze a bit, further rises in gilt yields might be in prospect. But given that any fiscal stimulus in the UK will be fairly small compared to that in the US, we doubt that these rises will be too large. Moreover, official interest rates are set to remain on hold for a while longer yet. Even when they do start to rise, they are likely to do so only slowly.