Carney and Osborne raise prospect of earlier rate hike

UK 10-year Gilt yields moved decisively back up to levels last seen over a year ago touching 2.79% at one point.  The spread over their German equivalent, Bunds, rose to the highest level since 1997 to 1.37%.  The cause of the move was attributed to Bank of England Governor, Mark Carney, who used his Mansion House speech to say that interest rates could move higher earlier to match the unexpectedly good improvement in the UK economy. There is also the clear message that interest rates are seen as a weapon to be used against house price inflation.  George Osborne also gave an upbeat assessment of the economy on the same evening. We believe that the central view, both the Chancellor and at the Bank, is that stock and bond markets may have greater tolerance for an interest rate increase before the election if it can be seen as evidence that all is well with the economy.