A View from the Bridge - July 2012

With the UK in recession, the continued threat from the Euro region and the USA still sluggish, it is no surprise that interest rate rise expectations have all but disappeared in the near term.

Both LIBOR rates (out to 1 year) and Fixed Term rates (longer than 1 year) were lower. A comparison of the implied forward curve for SONIA (the closest market benchmark to the UK Base Rate) shows that the markets view for possibility of a cut in the Base Rate by another 25bp has increased in the near-term and that Base Rates over 1% will come in mid 2016 rather than the end of 2015 predicted at the end of last month.

UK Government Bond yields tightened in as the Bank Of England continued it’s Quantitative Easing programme and International Investors continued buying UK Gilts in preference to Euro Sovereign Debt. The 10 year UK Gilt Benchmark closed at a yield of 1.4850% (1.7340%) and the 30 year UK Gilt Benchmark closed at a yield of 2.8860% (3.0380%).

In the Foreign Exchange Market GBP was pretty much unchanged against the USD$ at 1.5650 (1.5707) , but stronger against the EURO at 1.2740 (1.2401)

In the credit markets the UK Banks performance was varied, with RBS, Lloyds, Nationwide and Santander UK credit spreads (risk) all tighter (less), but Barclays and HSBC both slightly wider (increased risk).