A View from the Bridge - December 2012

The last month of 2012 hasn’t exactly been a time for the politicians of the western world to look back on a year of growth and prosperity, but the spectre of inflation and rising unemployment have resulted in the central banks in Switzerland, Japan, the USA and the UK keeping base rates at or near Zero. This justification for keeping rates low may see a divergence at some stage in the coming year with the US Fed committed to keeping rates at 0% until unemployment falls below 6.5% and the ECB committed to keeping rates low as long as inflationary pressures remain under control. The big question at the turn of the year has been will the US fall off the fiscal cliff. The US politicians look like they turned to their European counterparts for inspiration and the ability to duck the real issues has been kicked down the road again. For the moment the stock markets are relieved on the back of growth prospects but the pain still has to be taken at some stage and the rating agencies and the fixed income markets will sniff that out soon enough.

2012 started the year with 1 3 & 6 month LIBOR at 0.77%, 1.08% & 1.38% respectively, but ended at 0.49%, 0.56% & 0.67% showing a marked reduction as well as flattening of the yield curve. Similarly Fixed Term rates (longer than 1 year) all declined over the year out to 20 years, but unlike short dates with a steepening of the yield curve, 25 and 30 years remained roughly unchanged over the year.

According to the market Base Rate expectations of another cut in 2013 have reduced and expected to increase above 0.5% from 2015, Base Rates over 1% are now expected in 2017.

UK Government Bond yields ended 2012 lower over the year apart from 30 years which was unchanged. The 10 year UK Gilt Benchmark closed at a yield of 1.8280% and the 30 year UK Gilt Benchmark closed at a yield of 3.10%.

n the Foreign Exchange Market GBP ended the year only slightly changed from the start, against the USD$ at 1.6255 (1.5543) and against the EURO at 1.2317 (1.1987).

In the credit markets there was a marked reduction in UK Banks 5 years CDS spreads over 2012 where RBS ended at158bp (started 2012 @ 344bp), Lloyds 133bp (started @342bp) , Barclays 128bp (started @196bp), Nationwide 142bp (started @199bp), HSBC 74bp (started @144bp) and Santander UK 184bp (started @342bp).

Source PegCap GBP Monthly Report