The credit expansion, although stuttering in some areas such at the US sub-prime market, continues and thus inflationary fears, not surprisingly, also continue. The US Fed, in their latest minutes, say that all of the members of the committee agreed the predominant policy concern remains the risk that inflation will fail to moderate as expected and that further policy firming might prove necessary to foster lower inflation.
The International Monetary Fund has backed expectations that the Bank of England will raise interest rates again, warning that higher borrowing costs may be needed to bring the sizzling housing market back under control.
The words “be careful what you wish for” come to mind – the end of this unprecedented period of credit expansion will be followed by an unprecedented credit crunch. So, ‘yes’ short-term interest rates may rise a little bit more, but the credit crunch exacerbated by those higher interest rates will surely bring them tumbling down again!
Recently the US Fed, the Bank of England, the Bank of Japan and the European Central Bank all held rates at current levels.
Gilts have been weaker of late and if inflation were to take hold and the credit crunch not occur, then such investments will become unattractive. We watch for that but expect nonetheless for the credit crunch to provide a huge boost to investments in government debt. The widening of credit spreads currently at historic lows will generate as sentiment turns, a flight to quality. Spreads will widen horribly as investors sell Triple C non-investment grade debt and buy instead Triple A, sovereign debt.
The long-term bull market for long-dated UK gilts has not ended although, of late, it has been under pressure. For the time being at least, we consider them good investments for the developing conditions.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/