Chart of the week
On 4 November, the Bank of England (BoE) surprised markets by keeping its policy rate unchanged at 0.1% despite previous suggestions of a rise. The BoE’s monetary policy committee members had voiced concerns over the inflation uptick in recent weeks, yet ultimately adopted a very accommodating stance at the end of their meeting. UK bonds rallied sharply as a result, with 10-year Gilt yields falling 14 basis points in one day. Similarly, 1-, 2-, and 3-year yields each lost over 20 basis points. The graph below shows the UK yield curve before and after the Bank of England meeting (source: Bloomberg):
Following the BoE’s surprise decision, UK yields experienced their biggest one-day drop since 2016. The move affected other big sovereign bond markets, with the German 10-year Bund falling 6 basis points and US 10-year Treasuries shedding 7 basis points.
Sovereign yields continued downwards in the following days, exerting pressure on the credit market and especially on subordinated financial debt, which had initially reacted very little. In the space of two days, yields fell 12 basis points in the Tier 2 investment grade market and 9 basis points in the AT1 market. The patience being displayed by Western central banks also opens the door to a year-end credit market rally, provided the interest rate volatility does not subside.
Noteworthy is that the picture across Europe is far from uniform. On the same day as the Bank of England left rates unchanged, the Czech National Bank raised its policy rate by a more-than-expected 125 basis points to 2.75%. The day before, Poland’s central bank raised its rates for the second time in two months, this time by 75 basis points to 1.25%. So far, Western and Central European countries are responding to rising inflation in very different ways.
The following opinion was written on November 10, 2021 and is susceptible of changing.
Sources : Bloomberg, and calculation from Lazard Frères Gestion
As of : November 10, 2021
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