View more on these topics

Brian Tora: Gilt yields suggest base rates rise sooner than expected

Yields on 10 year gilts and US treasury are back above 3 per cent for the first time since 2007 and give a strong indication that central banks will begin to increase base rates sooner than expected.

Brian-Tora-MM-Peach-700x450.jpg

Uncertainty over how developments in Syria might pan out continued to weigh on market sentiment last week although news elsewhere was generally more encouraging.

Economically, our global business village appears to be making slow but steady progress although India has continued to cause concern. Last week saw Goldman Sachs lower its expectations for India’s GDP growth this year to 4 per cent, while the Rupee hit new lows against the dollar.

In contrast, sterling seems to be taking encouragement from the new Bank of England governor. His apparent stance on interest rates at first pushed the pound lower, but his determination to restore the strength of the banking system is helping rebuild confidence and attract buyers for our currency. Moreover, there seems growing confidence that his unemployment target might be met sooner than expected, allowing interest rates to rise.

In some regard it is surprising that our benchmark FTSE 100 Share index is not making more progress although the influence of mining shares on its performance will not have helped matters. Perhaps we can get more of a steer by looking at other markets. The FTSE 250, much more of a domestically focussed market, has been doing rather better than its large cap stable mate. But fixed interest markets are even more interesting.

Last week saw a momentous landmark in government bond markets reached, with ten year yields breaking back above 3 per cent in both the US and here in the UK for the first time since 2011. They have been trending steadily higher ever since Ben Bernanke first indicated that quantitative easing may be coming to an end, but a steady stream of more encouraging economic data is building momentum on both sides of the Atlantic.

What this is telling us, of course, is that interest rates will be going up in the not too distant future. Some futures markets are already factoring in base rates here of over 2 per cent, perhaps as soon as 2015. Yet banks are still cutting back on how much they pay savers, while annuity rates remain depressingly low.

While I consider it hardly likely that Mr Carney will act precipitately – he can allow the market to do much of his work for him – by next year the writing will surely be on the wall for dearer money.

Higher interest rates will benefit huge swathes of the community, with savers now having been starved of decent returns for several years. But the risk is that the squeeze on borrowers will intensify before economic growth starts to reward consumers. This could lead to wage demands of inflation plus, something that has been remarkably absent for some time. The indicator to watch will be the incidence of worker unrest – in other words, more strikes.

It could be that next year turns out to be an interesting one for investors, with opportunities and threats abounding. More evidence of a sustainable economic recovery could lead to more activity in mergers and acquisitions, not that we are particularly short of excitement in this arena at present. Last week saw two massive corporate deals in mobile telephony involving some of the biggest names in technology and telecoms.

If the slide in government bond markets continues, we could see a return of the reverse yield gap, when equities yield less than bonds, suggesting an appetite for risk has returned.

Better economic progress could lead to more generous wage settlements, stoking a consumer recovery which remains tentative in the current climate. None of this need be negative for shares, but the winners and losers are hard to identify at this early stage. And we do need to watch out for strikes, not to mention unrest in the Middle East. Roll on next year.

Brian Tora is an associate with investment managers JM Finn & Co

Recommended

Business-Corporate-Board-Room-Meeting-Hire-Hiring-700x450.jpg

OBSR founders launch fund ratings service

OBSR founders Richard Romer-Lee and Nigel Whittingham are launching an investment consultancy and fund rating business. Called Square Mile Investment Research and Consulting, the new business will also have former Henderson director David Pickles as a co-founder. Romer-Lee says: “Market has moved on with changes and regulation. RDR has turned a lot of businesses on […]

3

Support for state pension spending grows as welfare attitudes harden

Public support for state pension spending has grown significantly in the last 30 years as attitudes towards other welfare spending has hardened. The British Social Attitudes survey, published today, shows 72 per cent of those surveyed said pensions are in their top two priorities for benefits, compared to 64 per cent in 1983. Disability benefits […]

Wheatley-Martin-2013-Speaking-700x450.jpg
11

FCA reviews £1trn cash savings market and considers annuities study

The Financial Conduct Authority is launching a study into the £1trn UK cash savings market as part of a competition review, and is considering whether to carry out a review into competition in the annuities market. The study will be part of a programme of work where the FCA will look across financial services markets […]

Campbell-Macpherson-MM-Peach-700x450.png
1

Campbell Macpherson: Platforms at a crossroads (who will be the winners?)

As an industry, platforms are a loss-making collection of businesses. And there is no guarantee that this situation will change, even with AUA forecast to triple over the next five years. Campbell Macpherson takes a stab at who – or what – may emerge as likely winners in the future.

Planning now for the residence nil-rate band

Graeme Robb, senior technical manager at Prudential, writes about the residence nil-rate band and the advice opportunities it presents for you when tax year-end planning with your clients. On our Planning Matters hub, we considered a widow, Margaret, and a married couple, John and Anne, for whom the residence nil-rate band (RNRB) is influencing planning […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com