Treasury bonds outperform as two-30 spread narrowest since April

Not much room for “unnatural” profit there.

“Banks were on the verge of going bust, [the Bank of England] needed to stimulate the economy, they needed to stimulate borrowing and they needed to support the banks, so they gave them favourable lending conditions”. However, the feeling is growing that this is about to change.

The Federal Reserve has made clear its plans to begin raising interest rates this year, and many economists expect the first move to come next month.

The Bank of England is likely to follow up that decision with an identical increase of its own soon after.

Many borrowers will have forgotten what it feels like for the Bank to mandate an economy-wide increase in the short-term cost of money.

All borrowers are different, but let’s consider a fairly typical example. Stephen D. Williamson, vice president at the St. Louis Federal Reserve, writes, “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity”. The gauge is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. A stronger United States dollars is holding back the CPI by making imported goods more affordable. By his measure, the total return on stocks so far this year has been 2.3%, while bonds decreased 2.5%. For many families, that could prove tricky to find. In Europe, analysts and investors were suggesting that the European Central Bank might be forced to extend its 1 trillion euro bond buying programme beyond its scheduled end in September 2016 if inflation stays stubbornly low.

The Labor Department reported on Wednesday, August 19, that the consumer-price index increased by a seasonally adjusted 0.1% in July from a month earlier and on the year-on-year basis, CPI was just higher by 0.2%.

Want an investment that might actually benefit from rising short-term rates?

However, the Bank is rightly in no hurry to put rates up.

More adventurous investors, with stock and bond funds in their 401(k) plans, may be losing sleep over the prospect of higher rates.

During their discussion of economic conditions and monetary policy, participants mentioned a number of considerations associated with the timing and pace of policy normalization.

Meanwhile, British borrowers could become squeezed by greater repayments which could have dire consequences for consumption and overall GDP growth. Their long-term interests are aligned. Let’s say that six years later, interest rates have risen, and a newer bond is now offering a 4 percent coupon. But the uncertain outlook for inflation, which has been compounded by a steady slowdown in China, is muddying the water.

There “has been the lack of specials volume”, said Joseph Abate, a money-market strategist in New York at Barclays Plc, one of the 22 primary dealers that trade with the Fed.

There are reasons for believing that this “secular stagnation” theory is overly pessimistic.

That December price is better read as pricing a September rate move and then assigning a 57% chance of a further 25bps in December.

Aristotle, of course, would be pleased with zero interest rates forever.

Currently, Arnaud’s CF Canlife Global Bond fund has between a 5 and 10 per cent weighting in hybrid bonds, which combine both debt and equity characteristics.