Aurelia Butler

Big asset managers are buying up UK government debt again, tempted by the higher yields on offer after a much faster sell-off than in other large bond markets. Two-year gilts suffered a sharp sell-off on Tuesday, with yields surging more than 0.25 percentage points to 4.89 per cent, the highest level since 2008. However, they edged down on Wednesday in early trading to 4.85 per cent. The moves follow official figures that showed wages had risen at their fastest pace on record outside the coronavirus period, adding to concerns about stubbornly high inflation and further interest rate rises.Yields on longer-dated 10-year bonds, which are less sensitive to interest rate expectations, had a more muted response but still rose 0.09 percentage points to 4.43 per cent. The price moves extend a dismal year for gilts compared with US and European counterparts, with benchmark 10-year yields rising as much as 0.76 percentage points from the start of the year, reflecting a fall in prices. In contrast, benchmark German and US yields currently trade lower than at the start of the year, at around 2.43 per cent and 3.80 per cent, respectively. Some big investors believe the yawning gap between UK bonds and their German and US counterparts presents a buying opportunity. “For years we were underweight [gilts] and then we got the repricing and now we are at a level where 10-year yields look quite attractive versus the US,” said Andrew Balls, chief investment officer for global fixed income at Pimco, the world’s largest active bond fund manager. Balls said Pimco did not have a strong house view on gilts, but that some global portfolios were overweight as a “relative value” trade compared with US bonds. He added that his firm did not think the UK had more of a structural inflation issue than the US or Europe, as core inflation was “broadly in the same ballpark”. Core inflation, which strips out volatile food and energy prices, rose by 5.5 per cent in the US in the year to April, compared with 5.6 per cent in the euro area and 6.8 per cent in the UK. Official figures from the US on Tuesday showed that US core consumer price inflation rose by 0.4 per cent in May, matching April’s increase. Legal & General Investment Management, the UK’s largest asset manager, changed its tactical outlook on gilts from neutral to positive at the start of June, a trade that has so far performed poorly. But Chris Jeffery, the group’s head of inflation rates and strategy, said he expected the moves to be “partially self-correcting” as mortgage market conditions tighten, which would ultimately lead to lower consumption growth putting downward pressure on rates.For most of the past decade, US Treasury yields have exceeded their UK counterparts, reflecting higher central bank policy rates. But that has reversed and the extra yield on benchmark gilts above 10-year Treasuries is now at its highest level since 2009. BlackRock is also looking more favourably on gilts, with an underweight position on long-dated US Treasuries and euro area government bonds while neutral on UK debt.“We find gilt yields attractive as they have risen back near levels reached during 2022’s Budget turmoil,” the group said in its weekly market commentary on Monday. 10-year gilt yields peaked at 4.5 per cent last autumn in the wake of the crisis, while two-year gilts surpassed “mini” Budget levels on Tuesday. Craig Inches, head of rates and cash at Royal London Asset Management, which manages £150bn in assets, added that “gilts are now starting to look good fundamental value, specifically at longer maturities”.“In the last few weeks we have been increasing our duration stance and moving overweight UK,” he said. He added that while there was “a risk” that base rates could go to 6 per cent, in that scenario it would be “very unlikely” that longer-dated yields would rise above 5 per cent owing to the recession that rates at that level would induce. Traders have dramatically increased their outlook for UK interest rates in recent months, now betting that they will rise by more than one percentage point to 5.72 per cent by the end of the year. However, some analysts warned of more trouble ahead for gilts. “Other economies offer yield and safety. The UK is offering a lot of inflation,” said George Cole, an economist at Goldman Sachs. Ales Koutny, Vanguard’s head of international rates, said the UK was receiving “a lot of attention as high yields start to entice buyers” but argued that it was “not yet” the time to start buying gilts. “It is true that valuations have become very appealing, the spread vs the US is now as high as it was in the depth of the ‘mini’ Budget crisis,” he said. But he added that while bonds rebounded quickly last autumn, the risks this time were different.“A toxic combination of stubborn high inflation, higher global yields and political risks should limit the magnitude of any UK bond rally,” he said.  More

BANGKOK (Reuters) – Thailand’s central bank expects further gradual policy tightening as the benchmark rate is not at neutral levels yet and core inflation remains elevated, officials said on Wednesday.The Bank of Thailand (BOT) has increased rates six times since August as policymakers stepped up efforts to tame high inflation. The BOT has pledged to gradually return the one-day repurchase rate to normal levels consistent with long-term economic growth prospects.Southeast Asia’s second-largest economy has not yet reached its potential growth despite returning to its pre-pandemic level, assistant governor Piti Disyatat said at a monetary policy forum.”We will eventually get back to our potential growth of a 3% to 4% range. But now we’re still below that level, so we haven’t fully recovered,” he said. The BOT forecast economic growth of 3.6% this year and 3.8% next year, with some upside risks. Last year’s growth was 2.6%The economy has been driven by the tourism sector while exports remain weak. The BOT projects foreign tourist arrivals at 29 million this year and 35.5 million next year.On May 31, the BOT’s policy committee voted unanimously to raise the one-day repurchase rate by a quarter point to 2.00%, a level last seen eight years ago.”Overall, the monetary policy committee considers that at the moment, the financial condition or the policy interest rate may still be slightly in an accommodative zone compared with the neutral zone,” Piti said. Economists generally consider 2.5% as the neutral rate.The BOT will next review policy on Aug. 2, when some economists see a pause on rate hikes while others see a further increase.The central bank’s minutes released on Wednesday warned that the possibility of higher minimum wages could lead to a wage-price spiral.Despite annual headline inflation dropping to 0.53% in May and below the central bank’s target range of 1% to 3%, and the central expects prices to pick up late in the year as demand-driven pressures increase, said Surach Tanboon, senior director of BOT’s monetary policy department. Headline inflation is expected to be close to May’s level due to a high base last year, he added.”We see core inflation remaining elevated and sticky, making inflation risks high, especially in 2024,” Surach said.The BOT forecast average headline inflation at 2.5% this year and 2.4% next year. It sees core inflation at 2.0% in both years. More

An “economic” recession in the sense of a more sustained downturn is not currently expected, the ministry said in its monthly report.Germany entered a “technical” recession in the first quarter of 2023, defined as two consecutive quarters of economic decline. More

A review into the Reserve Bank of Australia’s (RBA) “more complex remuneration arrangements” identified 1,173 current and former staff owed roughly A$1.15 million ($777,975), according to a statement on Wednesday.Most of the money owed came from leave entitlements that should have been paid out when staff left the bank, the bank said. The RBA has contacted all the staff involved and begun making payments. The bank should be setting an example for the broader sector on pay and was right to apologise, according to Julia Angrisano, national secretary of the Finance Sector Union.“It should not be up to the Finance Sector Union to point out to the RBA that its internal procedures are leaving staff out of pocket,” she said in a statement.The Reserve Bank’s admission comes weeks after fellow Australian institution and the world’s biggest listed miner BHP Group (NYSE:BHP) said it owed workers A$280 million in leave and other entitlements from a 13-year period of underpayment.The review was done with the help of “big four” firm PricewaterhouseCoopers (PwC) Australia, which is battling a national scandal over the misuse of confidential government tax documents. Governor Philip Lowe said last month the bank would freeze all new work with the firm until there was an appropriate amount of transparency and accountability from the firm.($1 = 1.4782 Australian dollars) More

It’s no secret that in the US, certain types of insurance are getting pricier and tougher to come by. Allstate, State Farm and AIG have stopped underwriting new homeowners’ policies in California because of the risk of destructive wildfires. Private insurers have almost completely withdrawn from parts of Florida, Louisiana and other environmental-disaster-prone areas.But when it comes to sheer scale of macroeconomic impact, climate disasters can’t rival soaring US car-insurance costs. To wit: The cost of tenants’ and household insurance has climbed 1.6 per cent over the past year. Car insurance has soared 17.1 per cent. And if we’ve done our maths right — pls email us if we haven’t — motor-vehicle insurance costs have accounted for 18 per cent of the increase in unadjusted CPI from April to May. That’s . . . insane? At first we thought there could be a seasonal effect at play. But then we remembered that May’s increase in car-insurance costs was larger after its seasonal adjustment; up 2 per cent, compared to an unadjusted 1.7-per-cent increase. One reason auto insurance can make such a big impact on inflation is, to put it simply, there are way more car owners in the US than there are homeowners in disaster-stricken California, Louisiana and Florida. Motor-vehicle insurance had a “relative importance” comparable to electricity costs in April, which sort of makes sense since both are widely used with required monthly payments. Tenants’ and homeowners’ insurance was weighted similarly to bedroom-furniture costs.To step back a bit, readers may want to think of this as the opposite of the wireless-phone price wars that helped weigh down inflation in 2017. The underlying trends here are much weirder than a simple price war, as they include a new law in Florida, pricier car repairs, and possibly a TikTok trend. But those odd trends have all converged to drive prices higher for a quasi-utility, and that’s having a surprisingly large effect on inflation. Further reading:— What’s going on with US car insurance? (FTAV) More