A View from the Bridge - June 2013

In one of the most eagerly awaited speeches in recent months, Ben Bernanke signalled a potential reduction to the US stimulus package. That caused an immediate rush of blood to the head for many dealers around the world who dumped stock and caused interest rates to spike (see below). As policy makers sought to play down fears of any immediate action, the turning point of the US interest rate cycle may have already taken place! In Europe, Mario Draghi tried to calm the situation by saying it was too early to tighten ECB policy and the outgoing BOE Governor Mervyn King said that rises in UK interest rates were not imminent. It looks like taking away the QE medicine, whenever it happens, is not going to suit everyone at the same time.

In the Global economy, the World Bank has cut its growth forecasts to 2.2% and the G8 admits that the world economy is in a scary place. In 2 of the fastest growing economies of recent times, trouble is brewing as short term borrowing levels soar in China as credit seizes up, particularly in the interbank sector and in Brazil the lack of investment in public services and corruption have led to public disorder and rioting.

Back in the UK, not only did we not have a triple dip, but it appears we didn’t have a double dip. With lower unemployment, increased consumer spending and the nationalised banks being readied for sale, the outlook is more positive than it has been for some time. That said, we did see another UK bank nearly collapse but this time it was not bailed out by the State but by shareholders and bondholders, which reflects the new EU wide template for bailing out banks that go bust.

Finally, a welcome to Croatia who become the 28th EU member on 1st July.

Whilst there was no noticeable change in the near term rates, with LIBOR rates static through all maturities (3mth closed at 0.51%, 6mth closed at 0.60%), and stated above Fixed Term rates (longer than 1 year) moved aggressively upwards as expectations of future rate rises were increased (5 Years closed at 1.525% (+44bp), 10 years closed at 2.515% (+50bp), 20 years closed at 3.166% (+33bp) and 30 years closed at 3.307% (+25bp)).

UK Government Bond yields not surprisingly were also higher. The 10 year UK Gilt Benchmark closed at a yield of 2.44% and the 30 year UK Gilt Benchmark closed at a yield of 3.59%.

GBP future inflation expectations expressed through 20 year Inflation Swaps initially rose with interest rates before ending in the middle of the traded range with a low of 3.58% ,a high of 3.71% and closing at 3.65%.

In the Foreign Exchange Market GBP was unchanged against the USD$ at 1.5222 (1. 5198 ) and unchanged against the EURO at 1.1663 (1.1693)

In the credit markets UK Banks 5 years CDS spreads all ended higher with RBS ended at 226bp (+57bp), Lloyds 169bp (+20bp) , Barclays 161bp (+23bp), Nationwide 132bp (+20bp), HSBC 115bp (+31bp) and Santander UK 166bp (+11bp).