Swings and Roundabouts

It’s amazing how quickly the markets can change their minds

Key Points

· UK interest rate expectations can change dramatically over relatively short periods of time. Six months ago, there seemed no end to the fight against inflation.  The Bank of England remained adamant that inflationary forces were still persistent, while market expectations were that rates would peak at over 6%, settling at 5.4% until the end of 2024. In fact, we almost reached 5.25%.

· Three months ago, although market expectations appeared to believe, once more, that rates had peaked, any ‘good’ news on inflation was in short supply, so ‘higher for longer’ became the regular market mantra.  Fast forward to a month ago, a good core inflation print had the markets pricing in sharp rate falls this year, dropping to just 4%.

· Then, last week, an unpleasantly hot inflation number saw gilt yields soar, even though rate expectations changed only modestly, dropping by 0.1% to end 2024.

· During this overall time frame, UK 10 year yields peaked at 4.98% in October 2023, bottomed at 3.79% in December, before rebounding to 4.14% by 18th  January.

· This all might serve as a lesson that in times of expectation ‘flux’, gilts can be a volatile ride. So much so that in 4Q23, gilts had similar returns to global high yield but with double the level of volatility.  Another reminder of the importance of evaluating the level of ‘risk-adjusted returns’ rather than simply returns overall.