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20 April 2022

Market Round-Up

Times are getting tougher for bond investors this week. UK inflation continues to push ahead, having reached 7% year-on-year in March with the soaring price of energy continuing to ripple through the economy. Transport fuel price inflation tripled from nearly 10% to 31%, contributing to a powerful inflationary picture that erodes real bond returns. To counter the corrosive effects of inflation, bond prices tend to fall to increase their yields. No one said an energy transition would be easy. Meanwhile, central bankers, having slept through most of 2021, appear to be drowsily unfurling the garden hose as the house burns down. The Bank of England (BoE) has already increased rates to 0.75% and the US Federal Reserve (the Fed) approved a 25-basis point rate hike in March with more expected to come.

The Fed’s impending quantitative tightening (QT) programme is one to watch with interest. QT is the process in which the bank shrinks its balance sheet, thus removing money flow (a driver of inflation) from the economy. Instead, the Fed will be allowing bonds it holds (which have a combined value of US$9tn) to expire, and it will not reinvest the proceeds, meaning the money will, for all intents and purposes, disappear. Though officials have downplayed its significance, QT has never been done before successfully, with the last time being in 2019 where it stopped after markets seized up. The Fed becoming a net withdrawal from the system could disrupt liquidity, increase overall volatility, and see yields rise further.

In emerging markets, Sri Lanka’s Finance Ministry suspended payments on government bonds for the first time in its history. The country has turned to the International Monetary Fund (IMF) for support, though the default was priced in by investors, and has descended into political turmoil as protestors call for Prime Minister Mahinda Rajapaksa to resign. Not wanting to miss out on the action, Russia appears likely to follow suit with credit rating agencies assuming a default, with its Government threatening to sue if sanctions force a default. When the face of a country becomes its strongman, it becomes easy to forget the human cost of government defaults – spare a thought for the people of Sri Lanka and Russia.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Market Round-Up
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