Secondly, the structure of the UK pensions market, with the meaningful proportion of defined benefit obligations plus significant regulatory incentives to hold long dated index-linked gilts, presents a powerful bloc of demand at the long end of the UK curve.
The net result is that even with UK base rates still exceptionally low, the gilt curve is quite flat, and even a modest rise in front end rates will cause further flattening.
For an investor with significant UK asset exposure, there are three key messages.
First, the yield curve is a powerful indicator, but it is an inverted curve rather than a flattening curve that provides a signal.
Secondly, even for an investor with no US assets, it is an inversion of the US yield curve, rather than the local curve, that matters most.
And finally, while a flat or inverted UK Gilt curve has some signaling capacity, there are local factors which point to a structurally flatter UK curve throughout the cycle.
John Bilton is global head of multi-asset strategy at JPMorgan Asset Management
