Monthly Archives:

February 2011

MPC Minutes – Rate hike becoming ever more likely

This morning, with the release of the MPC’s latest minutes, we discovered that a further member of the committee voted for a rate hike at the last meeting. Spencer Dale voted for an increase in the base rate of 25 basis points. That now leaves the votes: 3 to tighten, 5 to stay on hold and 1 to further loosen monetary policy (Adam Posen is still calling for more QE). The general tone of the min…

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Hike Rates to Stamp out UK inflation. Really?

This week RPI broke through 5% and CPI broke through 4%. The media are almost universally calling for rate hikes, politicians are starting to voice their opinions loudly, and many investors are worried.

If the market reacts to higher inflation by pricing in more rate hikes, that’s bad news for gilts and index-linked gilts.  But for investors such as us who are trading so-called breakeven strate…

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(Fiscal) rules are there to be broken

A fiscal rule is a permanent constraint on fiscal policy through simple numerical limits on budgetary aggregates. The purpose of fiscal rules is to force governments into responsible fiscal behaviour at a time when it may not be in that government’s short term interests. Both the EU and the UK experimented with fiscal rules until the great financial crisis hit. Then all the rules flew out the w…

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The Billion Prices Project – a daily estimate of inflation

I came across this daily CPI estimate in a Bloomberg article this morning.  Called the Billion Prices Project (BPP), it’s run by two MIT academics and aggregates 5 million online prices on a daily basis.  Whilst the basket of goods is always going to be somewhat different to that used in the official data, the trends that the BPP model picks up can give a real-time guide to the direction of inf…

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Haircut 100 – how is the burden shared when a banking system goes bust?

When investing in credit, you perform a cost benefit analysis by weighing the risks you are taking against the spread you receive over risk free securities. This excess yield spread is easily observable, and from it you can work out the implied probability of default. It is not the end of the story when a bond defaults though. The important factor that will determine the eventual loss that you …

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And for my next trick….deal reached on bank bonuses & lending

George Osborne announced yesterday that the UK’s major banks and the government have come to an agreement over bonuses. Lloyds and RBS have gone as far as limiting cash payouts to £2,000. The deal has been agreed as part of Project Merlin – the government and the banks are attempting to come to some sort of settlement over how the banks should/will behave in the future.

As well as making the ba…

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European wage spiral to provoke the ECB into hiking? Not yet.

With the European Central Bank warning that the inflation outlook “could move to the upside“, and hinting that rates could rise despite the fragility in peripheral Europe, any sign of inflation-busting wage hikes would have been a big red flag for government bond markets.  IG Metall, the German metalworkers union, had demanded a 6% wage rise at the end of last year.  Today, IG Metall and Volksw…

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Inflation Hedging for Long-Term Investors – the most important academic paper you will read this year

You would have to be living under a rock to not notice the increasing number of articles dedicated to the topic of inflation. The increase in inflationary articles has almost been as dramatic as the increase in inflation itself. Even 3 out of our last 4 blogs have been on inflation. Unsurprising really, seeing as we are bond investors.  Looking elsewhere, the pundits have decided to focus on th…

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