Category Archives:

duration

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…

Read the article

Happy birthday to the credit crunch

We first started writing about the credit crunch 3 years ago (see August 2007). Since then, short-term interest rates in the USA, Europe and the UK have collapsed to near zero. Ten year government bond yields across the respective economies have fallen by around two percent.  Whilst the fall in interest rates and yields has been a great present for government bond investors, the global economy …

Read the article

Fixed interest markets performance review year to date – some interesting results

We have now passed the halfway mark of 2010 and we thought it would be interesting to put together some figures to show how various bond indices have performed year-to-date (as at July 13). BofA Merrill Lynch provide an excellent download service via Bloomberg which has allowed us to extract the data in the following table. Interestingly, in this perceived world of risk on/risk off, performance…

Read the article

What is the risk free rate anyway?

The risk free rate is a concept beloved of micro-economists and bond math geeks.  It’s the building block of Modern Portfolio Theory and an input into option pricing models.  It’s supposed to represent the interest rate available in the market that is without credit risk and as such is the lowest interest rate in the market.  The complete absence of risk has always been more observable in theor…

Read the article

How about a savings account with an interest rate of minus 4%?

Some interesting ideas about how Japan (and by extension the rest of us) can get out of the deflation trap in today’s Times.  The article, "To fight deflation, abolish cash", proposes that getting rid of physical money will allow policy makers to do something not possible in a world where the population can hoard bundles of bank notes in sock drawers – namely to set an effective negative nomina…

Read the article

Sub Zero?

Yesterday the Bank of England cut rates by 0.5% to the new record low of 1%. The problem that the BoE now faces is that it’s reaching the end of its effective use of traditional policy. Theoretically rates could be set below zero at a negative rate, by charging banks to deposit their cash. However, faced with a negative rate on savings, banks and individuals would simply invest in a safe, and s…

Read the article

Letter from the Governor to the Chancellor, July 2009 – "sorry about the deflation"?

It’s difficult to remain relaxed about the outlook for inflation in the UK given today’s strong CPI and RPI numbers (all above expectations), but, if oil is still at $145 a barrel, and food prices remain at these levels in a year’s time, we’ll be facing deflation. Not because these elevated prices levels will cause a collapse in consumer spending and reduce the demand for discretionary goods – …

Read the article

stoptrichet.com

I came across a slightly tongue-in-cheek website this week collecting signatories to petition against the ECB’s ‘intent to increase rates.’ It hasn’t had a great deal of success so far; a mere 5468 signatories out of a European Union population of around 500 million. Spain, which incidentally is likely to suffer more than most from a rate rise, has provided more than its fair share of the 5468 …

Read the article

Record sell off in European bunds

Short dated European bonds experienced a huge sell off last Thursday, after Jean-Claude Trichet surprised the market by stating that the ECB is now on ‘heightened alert,’ interpreted by many to mean a rate hike is very much on the cards next month. The yield on two year German bunds jumped by 29 basis points, or 0.29%, which was easily the biggest daily jump in 2 year bund yields since the inde…

Read the article

Interest rates to fall? Not by much, if you believe the bond markets

Continental European economic data has held up reasonably well so far. Consumer and business confidence has been reasonably robust in countries such as France and Germany, although retail sales numbers released earlier this week were weaker than expected. The big problem for the euro area has been a worrying rise in inflation (European inflation reached 3.5% in March, the highest rate in 16 yea…

Read the article