15-year gilt yields more volatile

Analysts call the widening of 5-year bonds a monetary-policy divergence caused by the hawkish Federal Reserve intending to raise interest rates and the dovish European Central Bank (ECB) considering to extend quantitative easing. This has driven the gap between the 10-year bonds where US Treasury are at 2.24% compared to German bonds at only 0.47%.

The 15-year gilt yields initially increased in November by 15 basis points from 2.23% to 2.38%. This would normally give annuity providers the opportunity to increase annuity rates by 1.5%, however, yields have now reduced back to 2.24%.

The above table shows yields have been volatile in the last six months after hitting an all time low of 1.68% in January, annuity rates for our benchmark example for a person aged 65 with a fund of £100,000 buying a single life, level annuity income offered has remained consistence over this period.

Inflation target still 2% level

For the UK, Europe and US the inflation target remains at 2%. The Federal Reserve policymakers are prepared to raise interest rates for the first time since 2006 provided there are no unanticipated shocks likely to affect the economic outlook.

The original intention to raise rates was delayed as financial markets triggered uncertainty over the China economy. The Federal Reserve have said the economy is on target to achieving the 2% rate of inflation in the future.

For Europe after the ECB started the QE programme eight months ago it remains plagued by weak growth and low inflation. German economist have said core inflation, excluding volatile components such as energy, is increasing and currently at the 1% level.

Even in the UK increasing interest rates has been delayed until later in 2016. Only if the US, Europe and UK can move in the same direction together in terms of interest rates and inflation will gilt yields move consistently higher followed by annuity rates although this may not be seen for another year.