Monetary Policy

If 2021 was a bad year for global bond returns, it follows there were few natural shelters to be found within fixed income from the brunt of inflation and rates-driven volatility; the Barclays Global Aggregate Index (a widely used broad measure of bond performance) returned -4.7% in USD terms, while European investment grade credit returned -1.1% despite credit spreads tightening over the course of the year.

It has been a very interesting start to the year in the rates sector of the market.

Given the swiftness of the Fed’s pivot we think risks are tilted towards the central bank doing more and not less. We wouldn’t even rule out a 50bp rate hike at some point.

What we are currently experiencing is a disconnect between monetary policy, the economy and the markets, a disconnect that in our view will struggle to survive much longer.

With rising government bond yield curves one of the biggest concerns for fixed income fund managers going into 2022, Eoin Walsh points to interest rate swaps as one option for reducing the rates risk of a portfolio without impacting its credit exposure.

This week the team at TwentyFour have been busy compiling our 2022 fixed income outlook, which will be published next week. There is no doubt we are confronted with a challenging set of circumstances, which will provide investors – not just in fixed income – with headwinds in the year ahead, and in particular we think during the first half.

So that’s the banks, rates, swaps and currency traders that all apparently got the wrong end of the stick. Explaining how you might arrive at a future monetary policy decision is a challenging and fine balancing act, but as Governor of the Bank of England that is of course one your jobs.

Speculation on the timing of the Bank of England’s first post-pandemic rate hike has been rife. But whether the BoE hikes rates later this week, next month or even waits until after year-end, it is worth thinking about what it will mean for the general public, a step away from the financial markets.

Following a turbulent week for rates markets, Eoin Walsh outlines what investors can expect as the Bank of England and other central banks meet this week.

Let’s not forget that the BoE dropped rates from 0.75% right down to 0.1% at the start of the COVID-19 pandemic back in March 2020, having only managed to put through two hikes in 2017 and 2018. It has changed course sharply before.

In the last month, global government bond curves have had a torrid time, with significant steepening seen across US Treasury, UK Gilt and German Bund yields.

On Wednesday, the Fed moved one step closer to tapering and even put quite a clear timeframe for it, while on Thursday, the Bank of England openly talked about rate hikes.