A good start to the financial year, but by the end of 2011, the finance headlines had been dominated by interest rating decisions, Sovereign debt, and more QE talk.
Good start…
The start of 2011 was promising. As the global economic recovery appeared to continue, commodity prices were pushing inflation rates higher. QE programmes were coming to an end, and bond yields increased in the US, UK, and core European markets, with benchmark interest rate increases anticipated. Not to disappoint, the ECB increased its benchmark rate from 1% to 1.5% in two between April and July, and three members of the Bank of England’s MPC were voting for an immediate increase in Bank Rate from February to May.
International natural disastor and weaker than expected economic data…
As the year progressed, the Japanese earthquake/tsunami combined with weaker than expected economic data took their toll. Bond yields relapsed, and yield curves flattened. In the US, the Fed communicated that rate increases were not expected until at least mid-2013, and “Operation Twist” was announced - a programme to sell shorter duration treasuries and reinvest in longer duration. Across the Atlantic, the ECB reversed its 50bps rate increases from early 2011, and in the UK, the MPC returned to a unanimous vote to keep rates unchanged, and a new QE initiative was in the frame.
Sovereign debt rears its ugly head…
The year finished with all eyes on Europe, and speculation about the future. Yield spreads on Portuguese and Greek government bonds increased significantly, and the spreads between German government bonds and other Euro-zone countries increased. Portugal then became the third country to receive a rescue package, and the continuing struggles in Greece led to proposals to write off a proportion of their debt. All of a sudden, the stability was called into question.
Credit spreads which, in general, were steady or a little tighter during H1 2011, significantly widened during Q3 as equity markets fell sharply and financial strains increased.