30 April 2016
Kempen Sterling fixed-income market commentary
‘It would be so nice if something
made sense for a change’
‘Alice in Wonderland’ by Lewis Carroll
.......................................................................
The UK economy is slowing, a referendum on the UK’s membership of
the EU is increasing uncertainty, data has been generally poor and the Bank
of England continue to vote unanimously for unchanged policy rates.
Yet, yields in April rose the most in 4 months. Curiouser and curiouser…
............................ ..........................................
Robert Scammell
30-year nominal yields increased by 0.12% with similar changes at
Portfolio manager
shorter maturities. Whilst these moves are not spectacular and the overall
M: +44 (0) 758 533 2844
level of yields remains low by historic standards, the increase in yields seems
T: +44 (0) 207 002 1424
to go against the majority of economic data that has been released over the
last month, which had been broadly negative. As such the recent increase in
yields would have brought a welcome fall in liability valuations but trustees
should perhaps be wary about the future outlook if the recent run of poor data
continues.
There was a whole series of disappointing data from the UK this month
that pointed to a slowing of momentum in the UK economy. The growth
in real wages slowed, retail sales fell over the month, industrial production
declined as did construction output and GDP growth of 0.4% for the first
quarter whist not dire, was the joint lowest number for over 3 years.
However, we should not look at UK gilt moves in isolation. Moves in
yields tend to be correlated across currencies and yields in both the US and
Euro-area rose over the month, and most notably in the Euro-area where
yields moved up 0.1% on the day of the latest European Central Bank
meeting. Whilst this general trend may explain why UK yields moved up it
does not explain why UK yields moved up by more than international
comparators especially considering the weaker than expected data.
So what explanation is there for UK yields moving by more than other
markets? Firstly, on 21 April it was announced that the government would
not reach its budget deficit reduction targets and that the UK would be
borrowing £1.8bn more than had previously been announced only a month
earlier. This resulted in UK yields rising as the market anticipated more debt
issuance over the coming years. Also in the first half of the month there were
a series of opinion polls showing a move towards a ‘Remain’ vote in the
upcoming referendum (see chart overleaf), and this also seemingly helped
yields move up by more in the UK than in other regions.
[email protected]
30 April 2016
Kempen Sterling fixed-income market commentary
If you have any feedback or
questions
usual
please
Client
contact
Director,
your
Robert
Scammell or Nicholas Clapp.
Nicholas Clapp
Business development director
M: +44 (0) 758 555 4438
T: +44 (0) 207 002 1431
[email protected]
So where do we go from here? Yields tried to break out of their recent
Kempen
trading range in April but in the end the forces of gravity pulled them back
60 Cannon Street
down. Given the current economic outlook and ignoring, for the moment,
any Brexit threats it is hard to see what could lead to a sustained and
sustainable increase in UK yields.
London EC4N 6NP
United Kingdom
For trustees this brings into sharp relief the hedging decision. The
economic recovery has been continuing for 7 years and many trustees
have been waiting for yields to rise before increasing their hedging.
However, we are now seeing a run of soft data and the possibility that the
recovery may be slowing. Trustees need to think about what happens if
instead of yields rising they actually fall. What impact would this have on
This document of Kempen Fiduciary Management is for
the funding level of the scheme and can the sponsoring company bear
information purposes to professional investors only. The
this risk?
information in this document is incomplete without the
verbal explanation given by an employee of Kempen
Fiduciary Management.
Kempen Fiduciary Management is a trading name of the UK
branch of Kempen Capital Management N.V., which is
registered in the United Kingdom (BR017904) at 60 Cannon
Street, London EC4N 6NP and which is a limited liability
company incorporated in the Netherlands, authorised by the
Dutch Authority for Financial Markets (AFM) and subject to
limited regulation by the UK Financial Conduct Authority
(FCA). Details about the extent of our regulation by the FCA
are available from us on request.
No part of this presentation may be used without prior
permission from Kempen Fiduciary Management.
2