Bond and gilt markets slowly returning to normal?

[Gan020]

The BOE got off the fence this month and determined that they do intend to act on inflation rather than keep telling us it is transitory.

5 members voted for a rise to 0.5%, 4 members voted for a rise to 0.75%.
The committeed agreed to unwind the £20b of QE on corporate bonds by ceasing to reinvest anything maturing and to sell the rest by the end of 2023.
Also, the committee's projections for inflation are based on a market implied path for the base rate to rise to 1.5% by the middle of 2023.


I am a little shocked to read a market implied base rate of 1.5% by the middle of next year. That's going to put a real squeeze on households, will reduce disposal income and should help to pull inflation down. As an investor of course I'm delighted. I'd much rather have interest rates of 1.5% than 0.1% albeit overall I'd much rather RPI wasn't 7%.

Prices of bonds, PIBS and Prefs have come off somewhat as a result. To me they still look priced too high but at least they are now a price I'm interested in looking at. It would probably take some persusion to get me to buy the fixed coupon prefs and PIBS but the short to medium duration bonds might tempt me if they continue to fall.

At least it feels like I have some options now rather than feeling every asset class I look at is over-priced.

[hiriskpaul]

The BOE got off the fence this month and determined that they do intend to act on inflation rather than keep telling us it is transitory.

5 members voted for a rise to 0.5%, 4 members voted for a rise to 0.75%.
The committeed agreed to unwind the £20b of QE on corporate bonds by ceasing to reinvest anything maturing and to sell the rest by the end of 2023.
Also, the committee's projections for inflation are based on a market implied path for the base rate to rise to 1.5% by the middle of 2023.


I am a little shocked to read a market implied base rate of 1.5% by the middle of next year. That's going to put a real squeeze on households, will reduce disposal income and should help to pull inflation down. As an investor of course I'm delighted. I'd much rather have interest rates of 1.5% than 0.1% albeit overall I'd much rather RPI wasn't 7%.

Prices of bonds, PIBS and Prefs have come off somewhat as a result. To me they still look priced too high but at least they are now a price I'm interested in looking at. It would probably take some persusion to get me to buy the fixed coupon prefs and PIBS but the short to medium duration bonds might tempt me if they continue to fall.

At least it feels like I have some options now rather than feeling every asset class I look at is over-priced.

Undated PIBS I hold are off their peak, but all except Coventry (CVBP) are still above the prices from a year ago despite the long end of the gilt yield curve moving up 0.3-0.6%. The higher quality PIBS (eg Leeds, Skipton, Coventry, Nottingham, BOI) still offer a decent spread over gilts though, average around 4.5%. I am not intending to buy more at current prices, but neither am I in any rush to sell. NWBD has a lower yield, but is now 10p below the recent tender price, which makes them interesting.

Any particular prefs/PIBS/bonds you have in mind?

[Gan020]

Any particular prefs/PIBS/bonds you have in mind?

Ok, firstly whilst I think things are returning to normal the gilt curve bothers me and I think there is some way to go

1 yr gilt 1.18%
2 yr 1.26%
3 yr 1.33%
5 yr 1.34%
10 yr 1.44%
20 yr 1.62%
30 yr 1.55%
and I can't get a price for the 50yr as I write but I believe it to be lower than the 30 year.

The very long dated yields are because the market believes that after the "transitory" inflation for the next couple of years rates will revert to very long term lows. That doesn't feel correct to me and until that changes prefs and PICS will be priced too high imho.

I only own RAVP out of the mainstream prefs and PIBS and I'm not yet a buyer partly because of my gut feel on the long term gilt yield curve but also because to get it will cost me a spread of about 2% and stamp. That's roughly 5 months of interest on a running yield of 5.5-6%. If I was in the trade I'd be more inclined to stay in due to the costs of switching.

If I'm pressed I see value in RAVP but I have plenty and of course that's political with Russia, but the short term bonds look better value to me whist I wait to see if the PIBS/prefs go lower yet. ENQ1 looks the pick of the bunch to me althought I only have a few and can't really explain why (gut feel). Co-op 26's which is one of my bigger holdings have re-priced to something far more appropriate. Otherwise I'm keeping my AXI and NBMI as the underlying loans have short to medium time to maturity or are floating rate.

[Newroad]

Hi Gan.

I continue to toss up which, if either, of the family BIPS positions (SIPP's or JISA's - not ISA's, they are HDIV) to flip to NBMI. I suppose logically, it would be SIPP over JISA given the longer timeframe of the JISA's, all things being equal.

A quick look at the chart showed a big NAV drop in NBMI around mid-November - any idea what was behind that?

Regards, Newroad

[88V8]

So what do we think of SKIP and NBSR now... what with the mortgage situation n'all... yielding >8% which is either an opportunity or a red flag.

Won't mention RAVP.

V8