March 2018 Yield Market Update

Transcription

1 March 2018 Yield Market Update

2 Historic yield movements 31 March 2018 Real yields 20 Year Real Gilt Yields April 2016 to date 0.0 Inflation 20 year implied inflation April 2016 to date 4.0 Yield (%) (0.4) (0.8) (1.2) (1.6) Real yields fell by 16bps over March, sitting at -1.70% as at the end of the month Long-term inflation expectations ended the month at 3.46%. (2.0) 2.0 Interest rates 20 year nominal gilt yields April 2016 to date Yield (%) Long-dated nominal yields fell 22bps over March, standing at 1.76% as at end of the month. Summary Nominal and real yields fell sharply over March 2018 on the back of fears over an escalating US-China trade war, and heightened geopolitical tensions. A general ri sk-off tone led investors to seek safe haven assets, as equity markets sold off over the month. Volatility was seen in both outright rates markets and across the curve. The real and nominal curves flattened further on news that there would be fewer syndications over the coming fiscal year, although some steepening returned as 10Y rates rallied most strongly from the flight to safety at month end. Expected inflation sold off approximately 6bps, as the February CPI print fell 0.3%, coming in behind expectations, owing to a slowdown in import price inflation. Long-dated (20 year) real yields are currently standing at -1.70% as at the end of the month. Contributing to this: - Long dated nominal yields stood at 1.76% at end of March; - Long dated inflation expectations fell to 3.46%. 2

3 Looking forward UK interest rates Forw ard curv es 31 March % The upwards sloping yield curve continues to imply that rates will rise going forward The question is, will they rise as fast as has been priced in? Interest rates Today v ersus implied position in 3 years time Implied yield curve in 3 years win lose or draw? The market has priced in a degree of interest rate rises the chart highlights the expected yield curve position in 3 years time. Win Lose Rising interest rates will only impact pension scheme valuations positively if the realised yields are above the position already priced in Spot 1yr Fwd 3yr Fwd 5yr Fwd 10yr Fwd Spot 3yr Fwd Base rate Implied base rate trajectory 31 March % We can plot the expected trajectory for the UK base rate Summary The UK forward curve continues to slope upwards implying that interest rates will rise going forward. We can identify the pace of these increases by looking at the forward curves. A subtle, but important, point is that rates have to rise above the market expectation to impact valuations positively. In terms of the impact of pension scheme valuations: - Win: yields in 3 years time higher than already priced in (by 3 year forward curve); - Draw : yields move up in line with markets expectation (i.e. follows forward curve); - Lose: Yields don t increase to meet the market s expected position. 3

4 Analysis of change Monthly yield movements Yield movements over past 12 months 12 months Nom Real Inf April (0.06) 0.06 May 2017 (0.04) 0.08 (0.12) June July 2017 (0.01) 0.05 (0.06) August 2017 (0.16) (0.20) 0.04 September October 2017 (0.01) (0.01) 0.01 November 2017 (0.06) (0.05) (0.01) December 2017 (0.13) (0.11) (0.01) January February 2018 (0.01) 0.04 (0.05) March 2018 (0.22) (0.16) (0.06) Note: All movements quoted in percentage points change over the period. Quarterly yield movements Yield movements over 2018 Period Nom Real Inf Q1 (0.07) 0.01 (0.08) Q Q Q YTD (0.07) 0.01 (0.08) Summary analysis Yield movements over past 12 months 12 months Nom Real Inf Max 2.12 (1.43) 3.76 Min 1.71 (1.98) 3.43 Longer term analysis Period Nom Real Inf 3 months (0.07) 0.01 (0.08) 6 months (0.26) (0.17) (0.10) 1 year (0.06) 0.07 (0.14) 3 years (0.53) (0.77) years (1.34) (1.27) (0.07) 4

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