Aurelia Butler

UK gilt yields are heading towards the levels of last year’s “mini” Budget crisis, investors say, after worse-than-expected inflation data forced markets to increase their interest rate predictions.The yield on two-year gilts, which is highly sensitive to interest rate changes, hit 4.4 per cent on Wednesday following stronger than anticipated inflation. The yield moves marked a sharp rise from 3.7 per cent earlier this month, leaving yields heading towards the 4.7 per cent peak last September in the wake of then-chancellor Kwasi Kwarteng’s disastrous “mini” Budget, which contained £45bn of unfunded tax cuts. Wednesday’s moves also reinforced the UK’s position as the worst-performing big global bond market this year.This time traders have been repricing bonds and swaps after weeks of strong inflation and jobs data, exacerbating concern that the Bank of England will need to increase rates further to bring inflation under control. Yields rise when bond prices fall.Paul Brain, a global bond fund manager at Newton Investment Management, said he had been looking to buy gilts but the sharp rise in core inflation had given him “a bit of pause for thought”.“The market is repricing what the Bank of England will do. We are being hesitant because it takes a while for the shock to feed through into the market view.”Swaps markets are pricing in three or possibly four more interest rate rises to a peak of 5.4 per cent by December, a sharp increase from an expected peak of 4.8 per cent at the end of last week.“I think there is further underperformance [of UK bonds] to come,” said Imogen Bachra, head of UK rates at NatWest, who now thinks the BoE will raise interest rates to 5 per cent by the end of the year, having not forecast any more rises ahead of April’s inflation data.“We could be talking about a peak above 4.5 per cent for 10-year gilts and close to that for 2-year as well.”Investors are particularly concerned about the rise in core inflation, which strips out volatile food and energy prices, which rose to 6.8 per cent in April, from 6.2 per cent the month before. BoE governor Andrew Bailey on Tuesday conceded that there were “very big lessons to learn” in setting monetary policy after the central bank failed to forecast the recent rise and persistence of inflation.While bond prices recovered last autumn after the BoE stepped in to buy £19bn of gilts on financial stability grounds, the yield on 10-year UK debt has risen from 3 per cent in February to 4.2 per cent today, and close to the “mini” Budget peak of 4.5 per cent.Quentin Fitzsimmons, a senior portfolio manager at US asset manager T Rowe Price, said he expected the rise in UK yields following the “mini” Budget last year to act as “a magnet” for bond prices.“The gilt market is putting up an amber flag — if not a red flag back — towards the Kwasi Kwarteng-[Liz] Truss disaster and I can’t see what will stop it, short of a very substantial recession.”UK bonds have performed worse than other big bond markets this year, which is evident in the widening “spread” — or difference in yield — between the US and Europe, an indicator that investors are demanding a premium for UK bonds.But some investors have viewed the sell-off as an opportunity to buy. “We have gone long duration in our gilt funds for the first time in five years,” said Craig Inches, head of rates and cash at Royal London Asset Management. More

Shut your eyes and try to visualise $160tn. It might seem impossible. Those zeroes in $160,000,000,000,000 — which almost take up a line by themselves — are enough to make anyone dizzy.But right now we should try anyway because a new report about the state of the world’s balance sheet (that is, its assets and debts relative to growth) contains a startling finding. Number crunchers at the consultancy McKinsey believe that, since 2000, the world’s stock of paper wealth (the speculative, unrealised price of all its financial assets) has jumped by some $160tn. Yes, really.Partly, that reflects real economic growth. But it primarily stems from a sharp rise in global debt and in the supply of money through quantitative easing, particularly in countries such as the US, which has raised asset prices. For every dollar of global investment made since 2000, some $1.90 of debt has been added. During the 2020 and 2021 period, this “accelerated to $3.40 for each $1.00 in net investment”, McKinsey says. This was the fastest rate in 50 years.That has raised the putative value of all global assets, relative to gross domestic product, from about 470 per cent of global GDP in 2000 to more than 600 per cent today, with real estate and equity markets booming faster than the “real” economy to a truly remarkable ($160tn) degree. Most of the time, this pattern is rarely discussed. That is partly because tracking this global balance sheet involves so much guesswork that few analysts have ever tried (except for some mavericks at the Bank for International Settlements). But it is also because it is a trait of human nature to assume that whatever we grew up with represents “normality” and will continue. And since stealthy asset price inflation has been happening for so long, even before 2000, it now feels entirely “normal”.Two factors now unfolding should make us all rethink this. One, asset price inflation has been a key factor behind the rising wealth inequality that economists such as Thomas Piketty have identified in recent years and which has poisoned western politics. Two, this trend of ever-rising asset prices might be about to change. A key factor behind it is that interest rates have been on a decades-long downward trend, making debt cheap. However, last year, rates jumped up, wiping some $8tn, equivalent to a third of the US economy, from household assets in 2022 alone. Perhaps this is a blip. The price of bonds suggests that many investors expect rates to sink in the future. And the McKinsey report, titled “The Future of Wealth and Growth is in the Balance”, outlines four potential future scenarios — one of which is a return to what we consider “normal”, namely low rates and more asset price rises. But I personally doubt that this is likely. This week Jamie Dimon, head of JPMorgan Chase, warned that “everyone should be prepared for rates going [even] higher from here”. That raises a key question: if we are moving into a new “normal”, how will we cognitively adjust?Unnervingly, the answer is unclear. Another of the scenarios sketched out in the report is one where inflation stays high and volatile for a long time, combined with some growth. If that happens it could unleash a pattern known as “financial repression” — the economic term for a place where the yields on long-term government bonds stay lower than inflation for several years, essentially causing anyone who holds such bonds to lose money each year.

A third option is a wave of balance sheet restructurings and recessions that reduces the excess debt. As David Graeber wrote in his book Debt, when debt and asset prices have surged before, it has typically produced political implosions or sent governments scrambling to create social “safety valves” — such as debt forgiveness — to avoid meltdown.This sounds sensible in theory; as ancient Mesopotamia discovered several millennia ago, the idea of “wiping the slate clean” of excess debts can enable a society to reboot. But McKinsey estimates that a fully fledged balance-sheet recession and restructuring could wipe out $48tn of household wealth in the coming years, with 30 per cent falls in equity and real estate prices in places such as the US. That would probably help to reduce inequality in the long run. But it would be such a shock that it could dampen confidence — and economic growth — badly. Of course, there is also another possible scenario: a productivity miracle that enables real economic activity to expand much faster than paper wealth and debt, rebalancing the world. That would be the holy grail. But it is hard to believe it will occur. So I would urge you, once again, to ponder that dizzying $160tn number. And then ask: can we adjust our minds to an era where asset prices do not always rise? What will be our future “normal”? Follow Gillian on Twitter @gilliantett and email her at [email protected] @FTMag on Twitter to find out about our latest stories first More

LONDON (Reuters) -The European Union set out plans on Wednesday to cut how much retail investors pay banks and insurers for financial products to encourage investment and make its capital market deeper and more efficient.The retail investment package toughens up existing EU investment laws by including a ban on banks and insurers paying commission on sales of their products by brokers who gave no advice to customers, the EU’s executive arm, the European Commission said.Only 17% of EU household assets were in the form of stocks and bonds in 2021, well below the U.S. level, as consumers prefer to keep their money in a bank. Retail investor fees are 40% higher than those institutional investors pay, the commission said.Most retail investment products are sold through a commission-based model with customers not always getting the best deals, the commission said.After heavy opposition from Germany, Italy, France and industry to a full ban on commission, the EU executive said it would take a “staged approach”.It proposes that the limited ban on commission is accompanied by a tougher tests on how suitable the products are for the buyer, where advice is being offered. Products would also have their “value for money” measured against new cost and performance benchmarks from EU regulators.”Evidence shows that there are some products on the market that provide little, if any, value for money to the retail client, in particular due to high costs of products,” the commission said.EU Financial Services Commissioner Mairead McGuinness told reporters that a full ban on commission was still on the table in three years time when there will be a review to see if retail participation in markets has increased, value for money improved, and costs cut.Consumer campaigner BEUC said despite the lack of a full ban on commission, the plans have the potential to limit costs for consumers, but will not be enough.The U.K. is also introducing tougher protections for financial consumers from July to draw a line under a string of mis-selling scandals.ICI Global, a funds industry body, said it seems unlikely that constructing granular cost benchmarks against all 30,000 EU-regulated mutual funds that would be evaluated can be done fairly across a diverse range of asset classes to avoid reducing innovation and choice.EU states and the European Parliament will have the final say on the package with changes likely. The main centre-left party in parliament said it would push for a full ban on commission-based sales. More