Category Archives:

Interest rates

BofE: The unreliable boyfriend finally comes through with the chocolates

The Bank of England unanimously raised its benchmark interest rate by 25 basis points to 0.75% – are gilts still an attractive investment opportunity? Are rising rates the main challenge to UK government and corporate bonds? Has Brexit risk been priced in?

Is the Bank of England right to raise rates?

The unreliable boyfriend finally came through with the chocolates – after months of going back …

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A new SONIA based bond. Does this mark the beginning of the end of LIBOR in public debt markets?

Last week the European Investment Bank (EIB) issued the first public bond based on the reformed SONIA benchmark, marking another step forward in the process of benchmark reform in the U.K. The 5-year, £1bn issue was priced with a coupon of 35bp above overnight SONIA.  The deal may very well serve as a benchmark for future issuance in the LIBOR-less world which the Bank of England and other regu…

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Time to sell Bunds?

German government bonds have gone from strength to strength in recent times; much like the German team at the World Cup – I wish! But is the latest Bund rally sustainable? I think not.

Let’s start with the bull case. In a recent blog, I described how Bunds had provided an efficient hedge against surging political uncertainty in Italy, due to the negative correlation between yields on German and…

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Why the Bank of England will pause tomorrow

If you looked at the post-referendum changes in sterling versus the dollar, or the movement in gilts, you’d be forgiven for thinking that Brexit was done and dusted. The 10 year gilt yield has bounced back to around pre-referendum levels hovering around the 1.4% mark (in August 2016, 10 year gilts rallied to historical lows of 0.5%), while the front end of the yield curve has moved higher. Simi…

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Beware the death of Libor

Guest contributor – David Covey (Financial Institutions Analyst, M&G Fixed Income Team)

The end is coming for the London interbank offered rate (Libor).  Ten years after suspicions emerged that this key interest rate was being manipulated in the financial crisis, regulators are ramping up their efforts to replace the benchmark rates. The Bank of England (BoE) and US Federal Reserve are leading …

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Mexico: a primer. Elections, inflation, the Bank of Mexico, NAFTA and gasoline

I’m just back from a fascinating research trip to Mexico City, to meet with policymakers, bankers, politicians, analysts, pension funds and regulators.  Like many emerging market economies, the Mexican economy has suffered over the past couple of years due to lower commodity prices and weak global demand for goods.  Of course, Mexico has had its own unique challenge with Donald Trump’s election…

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The euro and the dollar: rates not driving performance. So what is?

Despite US rate hikes in December, March and another last week, the US dollar has depreciated back to pre-election levels.  All of the Trumpflation dollar premium has disappeared.  As the Trump dollar trade appears to have run out of steam, the Euro has however been climbing. Optimism around the Euro area growth comeback grew leading up to the ECB meeting earlier this month, with EUR/USD hittin…

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Mortgages and monetary policy in the US and UK

The cost of new mortgage borrowing and payments on outstanding household debt can have a large impact on the rate of growth of an economy. For this reason, central bankers are interested in the transmission mechanism of monetary policy. It has been shown that interest rates can have a stronger influence on an economy where there are a high proportion of variable rather than fixed-rate mortgages…

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Tantrums and tidbits: Government bond market déjà vu

I have been overwhelmed by a sense of déjà vu of late. Talk of rates not rising again this cycle (US), ever again (Europe), or even being cut even further (UK, Japan) prevails. Quantitative easing continues apace and could be set to broaden further, be that in its duration or via the inclusion of new types of assets. Economic growth appears to be stalling, corporate profitability is showing lat…

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Mind the gap: what record low recovery rates mean for high yield investors

In order to assess value in credit markets, bond investors usually make some assumption about the future path of corporate default rates. This assumption generally stems from macroeconomic forecasts (strong/weak growth = low/high defaults rates) or sector specific events (like oil price movements). Following this, it is possible to get an indication of whether investors are being over- or under…

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