The move initially started after what the market took to be dovish comments from the Federal Reserve raising hopes for the longed for pivot to lower rates. Sterling rates moved in sympathy and after the most recent inflation print the short to medium (belly) of the yield curve also saw some strong moves reflecting what we initially saw further out. In the short term Sterling markets have possibly got slightly ahead of themselves discounting rates falling swiftly to below 4% by this time next year. We must remember that rates were normalised from an artificial low so unless we see a marked drop off in activity leading to a sharp recession, we are unlikely to go so far so fast.

Members of the Federal Reserve did try and push back against some of the more dovish interpretations following their last meeting, but they didn’t stop the 10 year yield falling almost 100bp. A soft landing scenario for the US economy appears to be still on the cards and it would be good to see a Central Bank pulling such a result out of the hat.

The ECB is more circumspect, and having come from negative rates and starting their hiking cycle the latest might hang on the longest before considering cutting rates. The Bank of England  has had to deal with a stagflationary environment which has now just been revised to negative GDP growth in Q3. 

Investment Grade continues to offer some solid returns across the curve and the short to medium end would be the biggest beneficiary of any aggressive cutting from the Bank. The primary market has been printing some coupons that investors have only been able to dream of in recent years. We took some recent new T2 issuance from Aviva, a solid credit, paying us 6.875% for a 10 year call and from Phoenix paying us 7.75% also over the same period. Fundamentally sound credits offer returns more predictable than they have been for years. We do not believe investors should, or need to, compromise credit quality by going down the food chain into high yield especially as you can achieve a high yield in IG. There is a HY refinancing hump coming in 2025 and a fair number of names will struggle to refinance, if they manage to they might have to pay penal rates to do so.
 

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.