Gilt yields increase as market confidence returns

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December analysis of annuities

The 15-year gilt yields increased by 8 basis points and could have ended the month higher were it not for the US fiscal cliff crisis. After staring the month at 2.23% the yields decreased to 2.31% and was never below 2.23%.

A number of factors helped to increase UK gilt yields, firstly the expectation that the Bank of England would not pursue a policy using Quantitative Easing (QE). the Bank of England uses QE to inject money into the economy by buying UK government bonds and gilts from investors thereby allowing them to purchase other higher yielding investments. This extra demand increases the price of gilts and reduces the yields. Investors

The other factor was the US fiscal cliff where President Obama and Republican House of Representatives had been negotiating to avoid the implementation of $600 billion of spending cuts and tax rises from january 2013. During the month markets were optimistic that a deal could be reached and this boosted investor confidence for the future with funds moving from safe havens such as US Treasury Notes and UK government gilts to higher risk investments. Gilt yields increased to a high of 2.45% on the 19 December and subsequently reduced to 2.31% as the negotiations were deadlocked at the end of December.

For December the yields range for the month was from 2.23% to 2.45% or 22 basis points which is more volatile than the previous month. Fig 2 below shows the daily 15-year gilt yields and the increase or decrease from the previous day's close:

15-Year Gilt Yields - December 2012 Mon 3rd Tues 4th Wed 5th Thurs 6th Fri 7th 2.27%   0.04 2.27% 2.26%   0.01 2.23%   0.03 2.24%   0.01 Mon 10th Tues 11th Wed12th Thurs 13th Fri 14th 2.27%   0.03 2.30%   0.03 2.31%   0.01 2.34%   0.03 2.35%   0.01 Mon 17th Tues 18th Wed 19th Thus 20th Fri 21st 2.37%   0.02 2.43%   0.06 2.45%   0.02 2.43%   0.02 2.38%   0.05 Mon 24th Tues 25th Wed 26th Thurs 27th Fri 28th 2.38% 2.38% 2.38% 2.30%   0.08 2.31%   0.01 Mon 31st         2.31%

Fig 2: Daily 15-year gilt yields and changes

Annuity rates were driven by the EU Gender Directive during the month with male rates reducing by an average of 2.77% and female rates increasing by 3.95%. For the latest updates see Annuity Rates Review.

After the gender neutral pricing has been applied with the new Unisex rates, the data suggests standard annuity rates may increase by 0.48% in the short term and smoker annuities may increase by 0.99% although the new EU Gender Directive is likely to force annuities lower by 21 December 2012.