LDI chart update: What’s been driving the recent fall in yields?

The chart above highlights November’s significant decline in yields, which followed our reflections in October and also early November on whether rates might have peaked for this cycle.

Here are the key drivers we see behind this move:

Weaker than expected data: both US and UK economic data readings have been weaker than expected, most notably US non-farm payrolls, US and UK inflation, and UK retail sales. Given the significance of these data points, the market read weakness as a sign that rate hikes were indeed slowing the economy, reducing the need for further hikes; hence the repricing lower of yields.

Central bank dovishness: at the US Federal Reserve press conference on 1 November, Jerome Powell came across relatively dovish. This came alongside a surprise refunding announcement by the US Treasury whereby its issuance will be skewed more to bills than long-end issuance. In addition, the Bank of England’s Chief Economist Huw Pill commented that it was not “unreasonable” to expect a rate cut in the middle of next year, resulting in a significant gilt market rally.

Potentially attractive UK yields: we understand there has been some flow out of US credit assets into gilts as UK yield levels are viewed as increasingly attractive in the eyes of many investors. Likewise, it is not unreasonable to assume there has been a pick-up in activity as investors aim to sort any hedging needs before the end of the year at what we believe to be potentially attractive yields.

Expected reduction in gilt financing: in the lead-up to the Autumn statement, consensus was for gilt issuance to be revised down. As a result, markets began pricing this reduced supply story, hence we saw yields fall primarily at the long end, flattening the yield curve.  

Autumn Statement surprise

However, following the Autumn Statement, we now know that the expected reduction in gilt supply not come to fruition and as a result yields rose modestly afterwards. In addition, the longer-term projections were also additive in terms of future supply. The table and chart below give a little more detail on this.

Source: LGIM, DMO, BoE 22 November 2023.

 Stay tuned for more regular LDI chart updates on the LGIM Blog in 2024.