Sterling Rates Conference

By Peter Schaffrik
Published October 22, 2021 | 10 min watch

On Wednesday 29 September 2021, RBC Capital Markets held a Sterling rates conference, and discussed key themes in the market such as the successful launch of the first-ever green gilt, central banks’ likely short and mid-term actions and future fiscal policy, and implications for the gilt market of regulatory developments in both the pension and insurance sectors.

The Gilt Market – Challenges and Change

Sir Robert Stheeman, CEO of the Debt Management Office (DMO), focused on the UK’s first green gilt issuance. He described it as a “very significant transaction” both for the DMO and the government given that it was “the largest sovereign green bond to date” and “attracted a very high-quality order book and very strong interest from ESG investor”.

He also reiterated that QE does not feature in the deliberations of the DMO. “Central banks globally did not just absorb supply from governments but also ensured that stable markets and financial conditions prevailed, for the benefit of insurers, but also investors. Market instability is not desirable, and they should get credit for having addressed it. QE should be seen in that context as well. If yields have to go higher to absorb that supply, so be it – we’re market takers. The market can - and will - handle that,” he concluded.


Central Banks and the Post Pandemic World - Recovery, Tapering and Market Implications

Tom Porcelli, Chief US Economist at RBC Capital Markets, expects the Fed to start tapering in November, and shortly thereafter, to start hiking rates. He predicts one hike for 2022, and two hikes in 2023 and 2024.

Peter Schaffrik, Head of European Rates and Economic Strategy at RBC Capital Markets, observes a very different situation in Europe. “Next year the ECB will still be in QE mode. It may not even increase rates until the middle of the decade - much longer than the market currently expects.” The BoE, on the other hand, has become more hawkish, with the QE programme set to end in December, the recovery well under way, and high inflation rates. He forecast a rate hike in May 2022 of 15bp to 25bp - increasing to 50 bp in November.


Remit Revisions and Beyond - Outlook for the Public Sector Finances

Cathal Kennedy, Senior UK Economist, at RBC Capital Markets, focused on the outlook for the UK public finances ahead of three significant upcoming events: the Autumn Budget, Spending Review and new OBR forecasts for the public finances. He pointed that those forecasts are likely to see the estimate for borrowing in the current fiscal year revised down. With regards to the medium-term outlook, he explained why ‘scarring’, the assumption of the longer-term impact of the COVID-19 pandemic on GDP matters to the outlook for borrowing. As for the Autumn Budget and Spending review, NICS increase/Health and Social Care levy represent a significant fiscal announcement. It also removes one of the big questions going into the next OBR forecast – how would the NHS’s post-pandemic catch up be funded?


Keynote: The Pension Schemes Act and Implications for Gilts

Jonathan Camfield, Partner at Lane Clark & Peacock, started by taking a look at the past of pension schemes. “In the 1980s and 90s, there was an equity focus. Generally, gilt investments were more for diversification purposes than hedging,” he noted. In the early 2000s, that changed as pension regulations strengthened when the government changed the nature of the contract between companies and their pension schemes after a series of big failures, with the introduction of the Pension Scheme Act of 2004. “Around the same time, accounting standards for bond-related schemes changed. Companies then realised the big risk attached, so the focus in terms of strategy switched to risk management. What better investment class to use for this than gilt with guaranteed returns from the government? That’s why we have seen a dramatic shift to gilts over the past 15 years,” he said. The Pension Schemes Act 2021 now implies a new, more prudent funding regime.


Bulk Annuities, Solvency II Reform and the Gilt Market

Gordon Aitken, Head of European Insurance Research at RBC Capital Markets, zoomed in on the factors which drive the growth of the market and how they impact long-bond yields. “An initial increase in pension deficits was one of the impacts of COVID-19, with declining gilt yields and a sharp decrease in equity markets, resulting in pension scheme solvency decreasing materially in the first half of 2021.” However, the first half slowdown is likely a blip, he said. “We expect bond volumes to be strong with bulk annuity volumes rising in the remainder of 2021 and beyond, so the future opportunity is not in doubt. Insurer bulk annuity profits are seeing strong growth, with bulk annuity writers among the cheapest.”  He also went through some of the reasons why the bulk annuity may be constrained: from superfunds potentially being a superthreat, to the fact investors may not see bulk annuities as very profitable, solvency II ratios being towards the lower end of the pack (tough regime and insurers are safer than ever before), low interest rates having an impact on profitability, longevity etc. Notwithstanding regulation which has been a headwind in the insurance sector - and investors expect it to continue, he added.

Peter Schaffrik

Peter Schaffrik
Chief European Macro Strategist, RBC Capital Markets

COVID-19Central BanksGiltPandemicPensionsSolvency II