Bond markets were cheered by an optimistic tone from the Chancellor Philip Hammond as he delivered his Spring Statement this afternoon.
The yield on the 10-year gilt fell back to 1.47 per cent, well below February’s high of 1.65 per cent, although equity market performance was more muted with the FTSE 100 little moved by the Chancellor’s speech, down 0.5 per cent to 7,179 by the afternoon.
Meanwhile the pound strengthened against other major currencies after Hammond’s upbeat statement, in which he revealed higher economic growth forecasts and hinted at the prospect of higher public spending in future.
He also said there was a "light at the end of the tunnel" for the UK economy, pointed to an expected downtrend in inflation, and reaffirmed his commitment to reducing the budget deficit.
Mr Hammond dispelled claims he was like the gloomy Winnie-the-Pooh character Eeyore, saying he was feeling "positively Tigger-like" about the state of the UK economy.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "The pound rose on currency markets in reaction to the improved economic forecasts, in particular the expectation that real wage growth will return to the UK this year, raising the prospects for higher interest rates.
"There’s not a great deal of reaction on the stock market, reflecting the stripped-down nature of the statement and the lack of any clear policy changes affecting individual companies.
"Despite the upbeat tone from the Chancellor, the UK is clearly out of favour as an investment destination for both domestic and overseas investors. In particular, retail investors continue to withdraw money from funds investing in UK shares, preferring international markets instead."
AJ Bell’s investment director Russ Mould said the Office for Budget Responsibility’s cuts to its inflation estimates should give the Bank of England some breathing space when it takes its interest rate decision next Thursday.
"All of this helps anyone with a mortgage, at least indirectly, so neither the Chancellor’s long-term debt reduction policy nor his statement today should be taken lightly," he said.
"The healthier the nation’s finances are, the more cheaply the government can borrow, as lenders will be more confident of ultimately getting their money back, and the interest rate at which the government can borrow forms the base of the calculation that sets the cost of mortgages.
"Anyone with a home loan may therefore get some knock-on benefits from today’s statement – providing the OBR is correct in its assessment of inflation and an unexpected economic downturn does not blow the budget deficit reduction forecasts off course."