UK Phnom Penh Bonds/Inflation: Stay away from panic stations
Just like a grumpy teenager and parents, the market may miss inflation badly when it disappears, but will be gloomy when it returns. Wednesday’s report showed that the price of British gilt bonds fell by 2.5%, higher than expected. Consumer price indexThis news will force the Bank of England to consider raising interest rates in the coming year.
The central bank governors of the largest economies are more willing to laugh at any embarrassing price increase. It’s just a stage, they mostly say. The labor market should be adequately supplied. The unemployment rate is still quite high, at 4.7%. Temporary supply bottlenecks and soaring commodity prices have caused at least some of the problems.
Inflation hawks point out that everything from building materials to second-hand cars is sending out a wide range of inflation signals. They say that too much cash is chasing too few commodities.
Therefore, the futures market in the City of London has digested some of the Bank of England’s interest rate hikes. Not many people expect a policy change this year. It is expected that by November 2022, the expected overnight interest rate benchmark will climb to about 25 basis points. This looks small. But any change in the central bank’s tone will disturb bond investors.
The panic situation now is based on momentum. As inflation concerns intensified, the argument of negative interest rates last year disappeared this year. Since March 2020, the five-year inflation expectations in the UK swap market have been inflating. They now forecast an annual growth rate of 2.4% in CPI, which is roughly the same level as two summers ago.
There is a better example to keep calm. The time curve of inflation expectations over a series of time periods shows little difference between short-term and long-term price prospects. Royal Bank of Canada pointed out that if the market is seriously concerned about the imminent higher structural inflation, then the curve should have a steeper slope.
As the UK ages, the demand for stable-if it is a low-yield Phnom Penh bond-is growing. One fifth of the population is over 65 years old. By 2050, this number will jump to a quarter. Domestic pension and insurance funds have no choice but to hold pound bonds. Excluding the Bank of England’s holdings, local institutions account for about 40% of Phnom Penh bond buyers.Overseas group, this year Also very keen on gilts, Accounting for another 28%.
As the economic reality became clearer, the market fluctuated slightly. But bond investors should look through this point in order to expire urgently below.
The Lex team is interested in hearing more comments from readers. Please tell us your thoughts on the prospects of gilts in the comments section below.