UK gilts are overvalued, currently yielding only 1%. The UK has seen a boom in consumer
credit in recent years, with rates around 10% YoY in the main categories of consumer lending
(top chart). Rising inflation has pinched wages, with the result real wages are now falling
again. Consumer credit helps fill the gap for many. However, this may be another arrow in
the BoE’s hawkish quiver, if it does decide to raise rates at some point (we have previously
argued that rising inflation is also a non-negligible risk for the BoE).

This makes gilts vulnerable. Furthermore, we have seen support for gilts decline, especially
from the private sector (bottom-left chart). Also, the bottom-right chart shows our Valuation
Score for gilts. It looks at how over/under-valued gilts are based on how stretched yields,
the yield premium and the stock-bond return are to their long-term averages. Currently it
sees that gilts should sell off over the next 6 months. (Click on image to enlarge.)

Source: Bloomberg, Macrobond, BoE and Variant Perception

(From our Weekly of June 27th)