March 2018 Yield Market Update · 2021. 2. 15. · 20 Year Real Gilt Yields – April 2016 to date...
Transcript of March 2018 Yield Market Update · 2021. 2. 15. · 20 Year Real Gilt Yields – April 2016 to date...
March 2018 Yield Market Update
Yield update
Historic yield movements – 31 March 2018Real yields 20 Year Real Gilt Yields – April 2016 to date
(2.0)
(1.6)
(1.2)
(0.8)
(0.4)
0.0
Apr
16
May
16
Jun
16Ju
l 16
Aug
16
Sep
16
Oct
16
Nov
16
Dec
16
Jan
17Fe
b 17
Mar
17
Apr
17
May
17
Jun
17Ju
l 17
Aug
17
Sep
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Oct
17
Nov
17
Dec
17
Jan
18Fe
b 18
Mar
18
Yie
ld (%
)
Real yields fell by 16bps over March, sitting at -1.70% as at the end of the month.Br
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1.01.21.41.61.82.02.22.42.62.8
Apr
16
May
16
Jun
16Ju
l 16
Aug
16
Sep
16
Oct
16
Nov
16
Dec
16
Jan
17Fe
b 17
Mar
17
Apr
17
May
17
Jun
17Ju
l 17
Aug
17
Sep
17
Oct
17
Nov
17
Dec
17
Jan
18Fe
b 18
Mar
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Yie
ld (%
)
3.0
Source: Bank of England
Interest rates20 year nominal gilt yields – April 2016 to date
Long-dated nominal yields fell 22bps over March, standing at 1.76% as at end of the month.Br
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Source: Bank of England
Inflation20 year implied inflation – April 2016 to date
2.0
2.4
2.8
3.2
3.6
4.0
Apr
16
May
16
Jun
16Ju
l 16
Aug
16
Sep
16
Oct
16
Nov
16
Dec
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Jan
17Fe
b 17
Mar
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Apr
17
May
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Jun
17Ju
l 17
Aug
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Sep
17
Oct
17
Nov
17
Dec
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Jan
18Fe
b 18
Mar
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Long-term inflation expectations ended the month at 3.46%.
Brex
it
Source: Bank of England
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 risk-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 rall ied most strongly from the fl ight 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%.
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Document Classification: KPMG Public
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Yield update
Looking forwardUK interest rates – Forward curv es31 March 2018
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0.5 5.5 10.5 15.5 20.5Spot 1yr Fwd 3yr Fwd 5yr Fwd 10yr Fwd
The upwards sloping yield curve continues to imply that rates will rise going forward…
… The question is, wil l they rise as fast as has been priced in?
Source: Bank of England & KPMG analysis
Base rateImplied base rate trajectory – 31 March 2018
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0.5 5.5 10.5 15.5 20.5
We can plot the expected trajectory for the UK base rate
Source: Bank of England & KPMG analysis
Interest rates – Today v ersus implied position in 3 years timeImplied yield curve in 3 years – win lose or draw?
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0.5Spot 3yr Fwd
5.5 10.5 15.5 20.5
© 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Document Classification: KPMG Public
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Lose
Rising interest rates will only impact pension scheme valuations positively if the realised yields are above the position already ‘priced in’.
Win
The market has priced in a degree of interest rate rises – the chart highlights the expected yield curve position in 3 years time.
Source: Bank of England & KPMG analysis
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 l ine with markets expectation (i.e. follows
forward curve);- Lose: Yields don’t increase to meet the market’s expected position.
Yield update
Analysis of changeMonthly yield movementsYield movements over past 12 months
12 months Nom Real Inf
April 2017 0.00 (0.06) 0.06May 2017 (0.04) 0.08 (0.12)June 2017 0.18 0.14 0.03July 2017 (0.01) 0.05 (0.06)August 2017 (0.16) (0.20) 0.04September 2017 0.24 0.23 0.01October 2017 (0.01) (0.01) 0.01November 2017 (0.06) (0.05) (0.01)December 2017 (0.13) (0.11) (0.01)January 2018 0.16 0.13 0.03February 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.Source: Bank of England & KPMG analysis
Quarterly yield movementsYield movements over 2018
Period Nom Real Inf
Q1 (0.07) 0.01 (0.08)Q2 - - -Q3 - - -Q4 - - -YTD (0.07) 0.01 (0.08)
Summary analysisYield movements over past 12 months
12 months Nom Real Inf
Max 2.12 (1.43) 3.76Min 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) 0.245 years (1.34) (1.27) (0.07)
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Document Classification: KPMG Public
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