UK

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.

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.

Fixed income markets have experienced a reasonable correction over recent weeks and, for higher-yielding indices at least, their first negative period so far this year.

This looks to us like a buy-into-the-dip opportunity, but investors should be wary of taking on too much rate sensitivity as the move in risk-free curves is likely to persist until the rate hike cycle is actually on the way.

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.

It will take time for this sector to recover and we are likely to see more suppliers collapse in the coming weeks and months.

The Bank of England have just added to the debate about how much of the recent surge in savings will be deployed in the form of consumption as we return to ‘normality’.

As more government bond curves around the world join the select group trading at negative yields, we are seeing a spike in ‘Japanification’ headlines in the press.

Regular readers of our blog will know that in the world of additional tier 1 (AT1), the Nationwide Building Society has been one of our favoured issuers in the market. We held the old sterling Nationwide 6.875% perpetual bonds from launch in 2014, and were not in the least surprised when the issuer called the bond at the earliest opportunity in June, though it did leave us a gap to fill in the subordinated bank sector.

“This time next year, Rodney…”