We still expect US Treasury and Gilt yields to move higher in the second half of the year, as US economic data continues to improve and we move closer to Fed and Bank of England rate hikes, while our asset allocation policy still favours equities over bonds.
There are however a number of pressures which are acting against our view. The Eurozone is our number one concern: inflation is low at a time when growth is very weak, threatening a fall into outright deflation, while the trade dispute with Russia is yet another headwind to economic recovery. Without a return to strong nominal growth rates in Europe, the debt hangover will only increase, particularly in economies such as Italy, with its record levels of public debt. This risks a reopening of the whole question of the sustainability of the Euro as a one size fits all currency system.
Closer to home, UK economic data shows few signs of significant slowdown, with the most recent set of PMIs pointing to another quarter of robust growth. Strong employment growth, coupled with low wage growth and heightened geopolitical risk, presents the MPC with a difficult balancing act. We still expect interest rates to rise very gradually in 2015.
