To what extent are anticipated interest rate hikes priced into current medium term yields ?

[Inv101]

Perhaps I have not posed the question very clearly, but what I - as a newbie - am trying to understand is the extent to which future interest rate hikes are reflected in current medium term (say 5 - 10 year) 5% - 6% yields.

Are coming rate hikes - say 0.75% next week - and perhaps 1 - 2% (theoretically) thereafter, likely to move yields, or are current estimates of something approximating to those hikes already priced in?

[88V8]

Perhaps I have not posed the question very clearly, but what I - as a newbie - am trying to understand is the extent to which future interest rate hikes are reflected in current medium term (say 5 - 10 year) 5% - 6% yields.
Are coming rate hikes - say 0.75% next week - and perhaps 1 - 2% (theoretically) thereafter, likely to move yields, or are current estimates of something approximating to those hikes already priced in?

Ha!
One often thinks that things are 'priced in' until those things happen, and then one finds they were not.
In my opinion, the likely Fed and BoE 75bps of 3rd November is certainly priced in.
As to 5-10 years, I have no idea, even the gilts market seems too volatile to respond solely to base rates.

In the near term, I don't expect much further fall if any, in the price of mainstream Prefs for instance. So one could say that your expected rate rise of 1-2% is baked in. I have recently been adding to AV.A, BWRA, ELLA, NWBD, on the assumption that even though there will be further base rate rises up to 200bps, we are now sitting on or near the price bottom for these shares and the only way is up.

I do think that the base rate rises will happen: OPEC will not allow a major fall in the oil price, Ukraine will not rapidly be resolved so food prices will remain high. However, that does not add to inflation because prices are already inflated, and I suspect that central banks will take fright at the impact of higher rates after so many years of rates on the floor, and will moderate their trajectory. One has only to look at the increased bad debt provisions posted by Lloyds and Natwest to see where we are already going, but I think this also is priced in, and the time to buy is now. The SPs of FI are more likely to rise than fall, yields are at their best.... imho.
An exception may be building society issues, as we have not actually seen the bad debt provisions yet, even though we know they are on the way.

I could of course be wrong, and in 6 months time I may be wishing I still had dry powder, but I am betting around 10% of our portfolio that I am not.

V8

[JohnW]

Fully priced in? While ever there is any uncertainty about the future, and there always must be, then there can be no ‘fully priced in’ as there must be some allowance being made for other outcomes. That’s purely my guess.

[air04]

Perhaps I have not posed the question very clearly, but what I - as a newbie - am trying to understand is the extent to which future interest rate hikes are reflected in current medium term (say 5 - 10 year) 5% - 6% yields.

Are coming rate hikes - say 0.75% next week - and perhaps 1 - 2% (theoretically) thereafter, likely to move yields, or are current estimates of something approximating to those hikes already priced in?

My experience is that all known information is priced into all assets. And all expected information is priced in based on expectation certainty. The yields move when the "certainty"% changes or what was expected does not happen.

If all known information is not priced in, then, no one will buy prefs today and will wait for the hike next week.

You can see below that implied rate is not 3.00% but 2.92%, that is the level of certainty as
https://twitter.com/EdConwaySky/status/ ... 4ol8zkE6cg

[88V8]

Fully priced in? While ever there is any uncertainty about the future, and there always must be, then there can be no ‘fully priced in’ as there must be some allowance being made for other outcomes. That’s purely my guess.

Priced-in does assume a steady state or a continuum of an expected state.
As you say, one can never quite know, not until afterwards.

V8

[88V8]

The SPs of those few Prefs I am watching/buying have eased up in the last week.
NWBD, AV.A, ELLA.
BWRA still sitting on the bottom at 6.4%

Adding steadily, although not now expecting so much of an SP increase in view the moderated expectation of rate rises.

V8

[MickR]

The SPs of those few Prefs I am watching/buying have eased up in the last week.
NWBD, AV.A, ELLA.
BWRA still sitting on the bottom at 6.4%

Adding steadily, although not now expecting so much of an SP increase in view the moderated expectation of rate rises.

V8

May I ask why you're not looking at BoI 13 3/8%?. They're currently yielding 7.9% and have a similar scope for capital gain

[88V8]

The SPs of those few Prefs I am watching/buying have eased up in the last week.
NWBD, AV.A, ELLA.
BWRA still sitting on the bottom at 6.4%

May I ask why you're not looking at BoI 13 3/8%?. They're currently yielding 7.9% and have a similar scope for capital gain

Yes, they could be a candidate, but for a lingering caution in view of the shenanigans a few years ago and the fact that we already have a bundle.

V8

[SKYSHIP]

Seemingly a single institution/pension fund has been liquidating their holding in one of the Aviva prefs - the 8.875% GACA.

Churning around last week in the 112p-113.5p range. At 113p, Friday's closing offer price, the flat yield of this irredeemable is a generous 7.85%; doubly generous in that there is more than 4p of accrued dividend as they go XD 4.4375p c1st December.

With the 10yr gilt below 3.3% and other fixed interest stocks seemingly turning the corner, GACA looks to be an anomaly worth buying into.

There is also the outside chance that Aviva will decide to make a generous Tender offer to rid themselves of this expensive debt. Prefs rank as equity, so the dividends cannot be offset against corporation tax; unlike the interest on a bond.

[simoan]

Seemingly a single institution/pension fund has been liquidating their holding in one of the Aviva prefs - the 8.875% GACA.

Churning around last week in the 112p-113.5p range. At 113p, Friday's closing offer price, the flat yield of this irredeemable is a generous 7.85%; doubly generous in that there is more than 4p of accrued dividend as they go XD 4.4375p c1st December.

With the 10yr gilt below 3.3% and other fixed interest stocks seemingly turning the corner, GACA looks to be an anomaly worth buying into.

There is also the outside chance that Aviva will decide to make a generous Tender offer to rid themselves of this expensive debt. Prefs rank as equity, so the dividends cannot be offset against corporation tax; unlike the interest on a bond.

Thanks. I wasn't aware of what had caused the selling but it was clear something anomalous was happening with larger than normal volumes over the past few weeks. I bought a load on 4th November @112.5p. Seemed a decent risk/reward bet to me, even given Aviva's previous conduct.

[88V8]

Seemingly a single institution/pension fund has been liquidating their holding in one of the Aviva prefs - the 8.875% GACA.

I've been buying AV.A but I divested all my General Accident quite a while ago on the basis that General Accident no longer exists other than in the form of the two Prefs GACA and GACB, and one could imagine that Aviva might like to tidy them away entirely.
However, after Aviva's bloody nose I suppose they could be viewed as being as 'safe' as Aviva's own Prefs so, yes, that would make them a good buy if they're still on offer tomorrow.
Otoh, one understand that it was only the instos telling Aviva to back off that brought about their change of heart, so if the instos are baling out of the GA....

Given that the SP of Prefs in general seems to have bottomed out I'm surprised that none of the issuers has made a tender while prices were low.

V8

[simoan]

Otoh, one understand that it was only the instos telling Aviva to back off that brought about their change of heart, so if the instos are baling out of the GA....

V8

Yes and it cost them a CEO too. I am working on the assumption the new CEO quite likes her job BTW some of the best investment gains I’ve made have been through buying when an institution is selling. Most institutions, especially pension funds, are pretty dumb.

[Gan020]

Seemingly a single institution/pension fund has been liquidating their holding in one of the Aviva prefs - the 8.875% GACA.

How do you know this? I haven't seen an RNS and I think as they are prefs there wont' be one. The pattern of traders looks to me there are multiple sellers

[SKYSHIP]

88V8 - not just the instos who objected to Aviva's crass action 4yrs ago. Everyone did. Questions in The House, condemnation by other pref issuers, universal disgust in the financial press.

Gan020. You may well be right - especially in view of comments on the ADVFN B/b by a well-known and respected broker:

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SKY,

I would say that it's part of the reason. It's difficult trying to ascribe a definitive number, as you can add in risk-free rates, economic downturn etc, but I'm sure there is an element of it..

Alp,

Are they going up? It could be MM games, it could be the seller has upped his price or has done what he needs to do.

There is too much emphasis on who, why, and what as everyone wants to get in at close to the bottom.

Let the market do what it has to, and ignore the noise!

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Not certain you will learn anything, even if you found out!

I think this (indisciminate) selling will be viewed as an opportunity when we look back. Of course circumstances may change, but as we stand at the moment, I'm happy to be invested

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CWA1,

We are seeing multiple asset classes being sold off, and I think it's technical rather than fundamental. Redemptions, and a hangover from the LDI issue could be part of the reason for selling across the board.

I comfort myself in the belief that I'm locked into an attractive yield for the time being. I don't think there will be any forced redemption, and my main fear is an unattractive exchange offer!

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[88V8]

...comments on the ADVFN B/b ....

I comfort myself in the belief that I'm locked into an attractive yield for the time being. I don't think there will be any forced redemption, and my main fear is an unattractive exchange offer!

Well silly me, never thought to look at ADVFN for commentary on something as pedestrian as Prefs.
So that's another morning time-stealer....

Bought some today sub-113.

V8

[SKYSHIP]

Decided we should have a GACA thread.....so have opened one up.