GOVERNMENT BOND MARKETS REMAIN CALM AS INFLATION RISES AGAIN

GOVERNMENT BOND MARKETS REMAIN CALM AS INFLATION RISES AGAIN

This week inflation has once more been the topic dominating financial markets. US and UK consumer inflation came in higher than predicted and the debate about whether this is temporary or permanent has been revisited. Looking at the underlying data there appears nothing new, with most of the inflation coming from economic reopening and artificially low prices this time last year. The biggest contributors in the US are petrol and second-hand car sales, as people return to work, while in the UK they are transport (including fuel), restaurants & hotels, and clothing.

Although there are one or two dissenting voices, central banks say they are committed to lower interest rates and bond markets appear convinced they will stick to their guns. Some shorter-dated government bonds fell in value this week but longer-dated bonds (which are more exposed to inflation) rose in value, sending yields down slightly. With the UK fully reopening, furlough about to be withdrawn and Joe Biden’s plans for further stimulus getting bogged down in political horse-trading, the bond markets are factoring in considerably slower economic growth.

GLOBAL: BOND MARKETS CALM AS INFLATION CONTINUES TO RISE

Inflation has continued to rise on both sides of the Atlantic. Figures out this week show US consumer prices pushed up 0.9 per cent last month, rising to 5.4 per cent in year-on-year figures, while UK inflation rose to 2.5 per cent, up from 2.1 percent in May. Inflation levels topped all estimates which raised fresh questions about the US Federal Reserve and Bank of England’s view that inflationary pressures are due to economic reopening and will be transitory.

Despite the argument, central banks have remained confident that the rise will be temporary and do not intend on adjusting interest rates anytime soon. The bond markets have also responded calmly to the rising inflation figures. There was a little more volatility during the week and some short-dated government bonds fell slightly. But in general, gilts and treasuries have seen their values rise, particularly for longer-dated bonds, which is a big change in comparison to earlier this year when the fear of inflation alone was enough to trigger a sell-off.

UK: BANKS CLEARED TO RESUME DIVIDENDS

UK dividend paying stocks performed well in the first half of 2021 as they continued to benefit from the reflation trade, which has favoured economically sensitive sectors like banks and energy companies. Dividend investors received further encouragement this week with news that banks have been cleared to resume investor pay outs. Before the Covid pandemic, banks accounted for more than 15 per cent of all UK dividend payments, but last year the banking regulator forced banks to suspend their dividends due to concerns about the potential steep rise in bad loans caused by coronavirus restrictions.

The current yield on the FTSE 100 is just over 3 per cent, compared with 4.2 per cent at the end of 2019. Banks are not the only companies restoring dividends. Many other companies have already announced special dividends to make up for 2020’s missing payments and so the yield on the index is expected to rise. Banks have outperformed the FTSE All share in 2021 but with the Bank of England sticking to its commitment to keep interest rates lower some of this outperformance has faded in recent weeks.

EQUITIES: SPACE INVESTMENTS ARE NOT “GOING TO THE MOON”

Despite Richard Branson’s successful trip to the edge of the earth’s atmosphere investors appear sceptical of the growth trajectory of space exploration investments. The Virgin Galactic founder beat rival Jeff Bezos’ trip by a few days to prove private space flight is possible. Virgin Galactic says it has pre-sold 600 tickets and plans to invest in more launch sites and new craft to meet demand. However, the company’s plans to expand the venture did not meet investor approval as the announcement of plans to raise $500m in a share issue saw its shares fall 30 per cent.

Virgin Galactic is not the only listed space exploration investment. This month saw the launch of the Seraphim Space Investment Trust and in the US several ETFs have been launched in recent years which offer the chance to invest in companies operating in space exploration and related technologies. It is early days for most of them but, so far, instead of heading to the moon their share prices have remained much closer to earth.