UK yields to stay low?
Investors currently buying UK government bonds are doing so in the knowledge that they are accepting a yield which is lower than the rate of inflation, i.e. the real yield.
We think that DB schemes waiting to hedge their real rates exposure, hoping for economic growth to improve and for rates to normalise, will remain frustrated
At LGIM, we think there are three key reasons for very low UK real yields (nominal yields minus the rate of inflation):
- Global structural forces suppressing long-term economic growth
- Weak UK economic growth
- Demand for UK inflation-linked bonds is higher than supply
Indeed, these factors could continue to subdue real yields for some time to come.
However, there is also a risk that the UK’s structural weakness, currently keeping real yields suppressed, eventually results in either deflation taking hold, or policymakers losing control of economic deficits. This could result in a dramatic increase in real yields as well as potentially negative implications for growth assets.
Before we drill into the implications for our clients, we will first discuss the outlook for UK real yields.
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Our approach is based on identifying market trends and new themes which can impact long-term investment performance.