DESPITE No Change to Interest Rates after Thursday's Monetary Policy Committee Meeting and Equity Market Jitters over Corporate Earnings, We Believe a Base Rate Rise Will Happen Sooner Rather Than Later

Sunday Business (London, England), July 7, 2002 | Go to article overview

DESPITE No Change to Interest Rates after Thursday's Monetary Policy Committee Meeting and Equity Market Jitters over Corporate Earnings, We Believe a Base Rate Rise Will Happen Sooner Rather Than Later


DESPITE no change to interest rates after Thursdays monetary policy committee meeting and equity market jitters over corporate earnings, we believe a base rate rise will happen sooner rather than later.

A rise is likely to see the gilt market weaken, with yields rising causing investors to look towards credit in search of value. But with investment grade spreads at around 79bp peaking at 137bp in mid-2000 plus the deterioration in credit ratings and uncertainty in corporate earnings, it is difficult to predict further significant tightening here. Equally, with strong demand from both institutional and retail, combined with coupon and redemption monies (pound sterling20bn-plus) and a relatively subdued issuance programme, the chances of a substantial widening in spreads appear remote.

Corporate bonds, as a whole, should outperform gilts over the next 12 months, given the overall yield advantage, although certain sectors, particularly triple-As at the long end (with spreads of around 25bp), offer very little break-even protection (ie a few basis points widening would result in underperformance against gilts).

While overall spreads should remain relatively tight, telecom credit spreads are likely to remain volatile. …

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