A View from the Bridge - March 2014

Dipflation, disinflation, deflation, whatever you want to label it, this is a major concern for policymakers around the world. With inflation dropping to 1.1% in the US, 0.5% in the Eurozone and 1.7% in the UK (technically all disinflation) the danger to the global economy becomes more acute as it prolongs the pain for borrowers and holders of illiquid assets, or more accurately it increases the real (as opposed to nominal) value of their debt.

The question of how to deal with this has of course varied in each central bank, with the US now easing it’s QE stimulus programme by a further $10bn to $55bn this month, the UK keeping the amount unchanged at £375bn, Japan only half way through its monetary easing programme and for the first time the ECB considering the possibility that it may actually have to start a QE programme.

Leaving aside the policy framework issues, interest rates have remained unchanged in all the major economies and in the UK we witnessed the 5th year anniversary of the base rate at 0.5%. Whilst this has of course had a growing impact on asset prices as investors search for yield, of more encouragement recently has been the growing signs of consumer confidence, with retail sales in the UK up 1.7%, in the Eurozone confidence is at the highest since 2011 and in the US it is at a 6 year high.

In the markets we had a more active month than last, having said that near term rates continue to move sideways (3mth closed at 0.52%, 6mth closed at 0.62%). Fixed Term rates (longer than 1 year) were higher mainly in the short end, 5 Years closed at 2.06% (+11bp), 10 years closed at 2.83% (+4bp), 20 years closed at 3.27% (+1bp) and 30 years closed at 3.31% (+1bp)

UK Government Bond yields were unchanged; The 10 year UK Gilt Benchmark closed at a yield of 2.74% (+2bp) and the 30 year UK Gilt Benchmark closed at a yield of 3.52% (+0bp).

GBP future inflation expectations expressed through 20 year Inflation Swaps traded within a tight range over the month opening at 3.56%, with a high of 3.63% and closing at 3.61%

In the Foreign Exchange Market GBP was lower against the USD$ at 1.6678 (1.6750) and slightly lower against the EURO at 1.2109 (1.2135)