UK gilt yields fell from 5% to 4.8% after markets reduced expectations of Bank of England rate rises. This followed guidance from Governor Andrew Bailey that further tightening may be limited.
The Decision Maker Panel survey (6–20 March) showed year-ahead CPI expectations rose by 0.5 percentage points to 3.5% year on year, a 27-month high. Year-ahead wage expectations dipped by 0.1 percentage points to 3.5%.
Household Income And Growth Outlook
The final 4Q25 GDP release reported real household disposable incomes fell by 0.4% year on year, compared with 0.3% in 3Q25. The report links weaker consumption through to 2027 to the energy shock, with around 40% of annual pay deals set in April and many agreed before the Iran war.
The March construction PMI is expected to soften in line with the composite index as orders weaken. The March RICS housing survey is expected to show weaker sales expectations as mortgage deals are withdrawn and two- and five-year swaps have risen by about 50bp to their highest since December 2024.
The Bank of England Credit Conditions Survey is expected to appear more positive because it was likely conducted before the shock.
We see a clear opportunity in interest rate markets as the Bank of England signals it is not looking to tighten policy. Last week’s drop in 10-year Gilt yields from 5% back towards 4.8% shows traders are starting to absorb this view. This suggests positioning for lower future rates through instruments like short-sterling or SONIA futures could be advantageous.
Market Positioning And Trade Implications
The squeeze on household incomes, which we saw begin with a 0.4% fall back in the final quarter of 2025, is set to intensify. The most recent GfK consumer confidence reading for March has already confirmed this downturn, plunging to -25, its lowest point in over a year. Traders should therefore consider buying put options on the FTSE 250 or specific retail sector ETFs to hedge against the expected fall in consumption.
The housing market also appears particularly vulnerable to a slowdown. Data from last week indicated that the average two-year fixed mortgage rate has already climbed back over 5.5% for the first time this year, a direct result of higher swap rates. This environment warrants a bearish view on homebuilders, making put options on major developers a timely consideration.
Upcoming data this week, like the March construction PMI, will likely confirm this economic softening. We should, however, disregard the Bank’s Credit Conditions Survey, as it was likely conducted before the recent energy shock and will present an overly positive picture. The real test will be how credit availability tightens in the reports covering the second quarter.
