09.11.09 1 Market Snapshot: Summary of rate movements and important - PowerPoint PPT Presentation

09.11.09 1

Market Snapshot: Summary of rate movements and important announcements Economics Watch: Contents: Monday: BoE 2020 – 2032 reverse gilt auction Last week Economics Watch 3 Tuesday: UK RICS housing market survey, price balance Equities 4 UK BRC retail sales monitor, total sales, % y/y Credit 5 UK trade balance (£ billion) 2019 Gilt Auction Nominal Yields 6 Inflation 7 Wednesday: UK BoE publishes quarterly Inflation Report UK Claimant Count Unemployment, change ‘000 Real Yields 8 UK Average earnings growth, % 3m y/y Other News: Property market upturn 9 BoE 2013 ‐ 2019 reverse gilt auction Spotlight on Central Banks 10 Thursday: UK Linker 2032 auction Appendix 11 US initial jobless claims Friday: Euro zone “flash” GDP, % q/q US Trade Balance, $ billion In 2009, Redington was ranked globally first for ALM/LDI Advice; second in the category of Manager Selection and third for Strategic Advice by Life & Pensions Magazine against a peer group of global firms (including Watson Wyatt, Hewitt and Mercers) Source: Barclays Capital Redington #1 in ALM/LDI; #2 in Investment Consulting; #3 in Strategic Advice; #3 Overall Consultant 2

Key data released last week Last week Economics Watch 02 ‐ Nov ‐ 09 UK Manufacturing PMI Index 53.7 03 ‐ Nov ‐ 09 UK Construction PMI Index 46.2 04 ‐ Nov ‐ 09 US FOMC rate decision Maintain the target range for fed funds rate at 0 to 0.25% UK Nationwide consumer confidence index 72 points UK Services PMI Index 56.9 05 ‐ Nov ‐ 09 UK BoE MPC Bank Rate decision Maintain official bank rate at 0.5% and extend Quantitative Easing programme by £25 billion Euro zone ECB rate announcement Maintain the key rate at 1% UK Industrial Production, % m/m (y/y) 1.6% m/m (Sep) UK Manufacturing Production, & m/m (y/y) 1.7% m/m (Sep) Euro zone Retail Sales, % m/m ‐ 0.7% US initial jobless claims 512,000 06 ‐ Nov ‐ 09 US Change in non ‐ farm payrolls ‐ 190,000 3

Equities : “FTSE 100 ends week up...” Figure 1: Total Return on major Equity Indices • Equity markets in the UK and US ended the week on a high with the FTSE 100 increasing by 1.9% and S&P 500 rising by 3.2% over the last week . The VIX index (CBOE volatility index) decreased over the week and ended at 24.19% . • The key focus for this week was the Central Bank meetings (see slide 10) • Fed Committee maintained the target funds rate at 0 – 0.25% and hinted at rate being low for an extended period of time • Bank of England maintained official rate at 0.5% and extended its Quantitative easing programme by £25 billion. The FTSE 100 reacted to the news by recovering its early morning losses and ending the day up 0.35%. • ECB maintained its key rate at 1.00%. The committee acknowledged the high uncertainty in the market but expects the euro area to recover at a Source: Bloomberg, Redington gradual pace in 2010 • Mixed economic data continued to be released during the week with equity Figure 2: VIX Index markets moving up and down. • UK manufacturing PMI index rose to 53.7 in October from 49.9 in September indicating that the sector is expanding; • British construction activity fell at a slightly faster pace in October than it had in September (PMI index dropped to 46.2 in October from 46.7 in September); • UK services PMI index rose to 56.9 in October from 55.3 in September; • US Non ‐ farm payrolls decreased by 190,000 and unemployment jumped to a 26 ‐ year high of 10.2% in October, more than the expected decline. Source: Bloomberg, Redington 4

Credit: “Credit remains resilient amidst mixed news flow...” Figure 3: Corporate Spreads by Rating • Credit was resilient this week despite mixed news flow and rising volatility, possibly on the back of strong technicals. Over the last week, corporate spreads as measured by the Barclays Sterling Non ‐ Gilt corporate index widened by 2 bps for AA but narrowed by 5 and 3 bps for A and BBB respectively. • On a sector basis, sub ‐ financials and cyclicals tightened by 14 bps and 3 bps respectively while spreads widened on senior ‐ financials, non ‐ cyclicals and telecoms by 2, 4 and 2 bps respectively. • The main focus of this week was the regulatory ‐ driven changes at Royal Bank of Scotland (RBS) and Lloyds Bank . • RBS: Key terms of the Asset Protection Scheme (“APS”) were Source: Barclays Capital, Redington restructured such as increase of first loss on pool to £60 billion from previous£42.2 billion; replacing the initial fee of £6.5 billion with annual fee of £700 million for 2009 ‐ 11 and thereafter of £500 million Figure 4: Barclays Sterling Non ‐ Gilt by Sector • Lloyds: Lloyds will pay £2.5 billion to avoid joining APS and will raise £21 billion including £13 billion via a government ‐ underwritten rights issue and £7 billion via an exchange offer into contingent ‐ capital notes. Source: Barclays Capital, Redington 5

Nominal Yields: “Nominal Yields rise across the curve...” Figure 5: Nominal Term Structure of Gilts vs. Swaps • Nominal swap rates remain above gilts at all maturities up to 25 years (Figure 5). Over the last week, both gilt yields and swap rates increased across the curve by about 18 ‐ 26 bps (5y ‐ 50y points) • Swap spreads at the short end of the curve (2y point) widened by around 12bps while in the middle of the curve narrowed by about 1 ‐ 2 bps. At the very long end, the swap spread increased by about 1 ‐ 2 bps as swap rates increased by more than gilt yields (Figure 5) • This week will be the first week of new Quantitative Easing schedule with Bank of England buying back £1.7 billion of 10 ‐ 25 years gilts on Monday (09 ‐ Nov ‐ 09) and another £1.7 billion of 3 ‐ 10 years gilts on Wednesday (11 ‐ Nov ‐ 09). Source: Bloomberg, Redington Figure 6: Nominal Swap Spreads (Z ‐ spreads) on Selected Gilts Source: Barclays Capital, Redington 6

Inflation: “Breakeven Inflation rises...” Figure 7: Gilt breakeven inflation term structure vs. swaps • Gilt breakeven inflation increased by about 10 ‐ 15 bps across the curve with the highest increase at the 30y point • Swap inflation moved by less than gilt breakeven, rising by about 6, 11, 8 and 12 bps for the 10y, 20y, 30y and 50y point respectively. The gap between Gilt Breakeven Inflation and Swap Inflation narrowed in the front end while widened in the long end. • The big event of the week will be Bank of England’s Quarterly Inflation Report on Wednesday. The report sets out the detailed economic analysis and inflation projections on which the Bank’s Monetary Policy Committee bases its interest rate decisions, and presents an assessment of the prospects for UK inflation 1 . Source: Bloomberg, Redington Figure 8: Swap Inflation ‐ Gilt Breakeven Inflation Source: Barclays Capital, Redington 7 1 Source: Bank of England website

Real Yields: “Z ‐ spreads on linkers decrease...” Figure 9: Real Gilt yield term Structure vs. Swaps • Swap real yields remain roughly the same as gilt real yields up to around 15 years. From 15 ‐ 45 years, gilt real yields remain above swap real yields after which the difference disappears (Figure 9). • The difference in real yields may be driven by differences in swap and gilt breakeven inflation. • Z ‐ Spreads are the weighted average constant spread added to the swap zero curve to get the market price of the gilt. They are used as a relative value measure between cash and the swap market. • Z ‐ spreads on linkers remain positive , but over the week have decreased by Source: Bloomberg, Redington around 4 bps for IL2020 and about 8 bps for IL2037 and IL2055 (Figure 10). Figure 10: Z ‐ spread on selected linkers • The decreasing z ‐ spreads on long end linkers, which are close to 0 now ,suggest a disappearance of relative value between cash and the swap market. The z ‐ spreads on long ended gilts on the other hand still are at around 10 bps. Source: Barclays Capital, Redington 8