GMP Independent Financial Advisors LLP

Wed, 22 Jun 2011 15:30:43 GMT

M&G's Michael Riddell posted this article on http://www.bondvigilantes.com/ I thought it was worth reproducing here,

Pound sterling is the weakest currency in the world today and we’ve seen a pretty big gilt rally, with 10 year gilt yields rallying 7 basis points to 3.1% at the time of writing, the lowest yield in seven months. The trigger was the minutes from the last Monetary Policy Committee meeting, where the crucial sentences were ‘current weakness of demand growth was likely to persist for longer than previously thought’ and ‘further asset purchases might become warranted if the downside risks to medium-term inflation materialised.’

The markets are now pricing in a first rate hike in the UK for August 2012, which is quite incredible if you consider that back in January the markets were pricing in three 0.25% rate hikes this year alone. The chart above shows just how violent things have been, where I’ve taken the market’s rate expectations for the month of August 2012 . Earlier this year the market was almost pricing in five rate hikes, now it’s just one. Anyone who’s been betting on a gilt sell-off or rate hikes will be in a world of pain.

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