2022 volatility in rates markets remains at extreme levels and petrol was thrown onto this bonfire by the arrogance, stupidity and naivety of over promoted politicians.

It is not often that the Gilt market takes centre stage globally and/or domestically but the unfunded fiscal give away had a dramatic effect across the curve and in particular the long end. As Sterling collapsed and pension fund LDI strategies imploded causing forced margin call selling to intensify, action was needed and it is fair to say that the Bank of England stepped quickly up to the plate with their long end bond buying program, undertaking to buy £5bn a day for two weeks (in practice only £18bn in total was used). They then sent a strong message that this was the extent of what they were prepared to do and this thankfully precipitated the removal of the Chancellor, a reversal of most of the unfunded plans and ultimately an end to the muppet show. The Bank’s reputation has been tarnished in recent times but this has been an effective period for them although the UK’s reputation from a credit perspective has taken a battering.

US treasuries suffered from contagion, and volatility in this sovereign asset class, as evidenced by the MOVE index, has been rising steadily since Q4 2021 reaching peaks close to those seen at the worst of the pandemic. The Federal Reserve remains uncompromisingly focused on attempting to get inflation back in its box and the continuing strength of US core economic indicators will only encourage policymakers to continue to hike.

The ECB will likely deliver another 75bp hike at their next meeting amidst their own heightened inflationary indicators across the Eurozone. Energy prices have moderated (European Natural Gas prices are back to January levels) but this won’t feed through for some time. Recent PMI’s for member states make grim reading and potentially the bloc is already in recession.

UK sovereign credit default swaps reflected the market mood and ballooned from 17 to 52, now back to 33. To put the moves in Gilt yields in perspective, the 2yr started the year at 0.68%, peaked at post mini budget highs of 4.65%, now at 3.42%. 30yr Gilts started at 1.14%, peaked at 5.06% and are now 3.9%.

The Sterling primary issuance market has effectively been closed as has the residential mortgage market, many lenders pulling the majority of their offers. Sterling credit spreads printed their wides of the year and at >2.5% over Gilt benchmarks make for some highly attractive all-in yields for high quality names, there remains little compensation for going further out on the curve.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance. 

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