From Tim Price – The London Investment Alert (Great Britain) –
With quantitative easing (QE) having played such an important role in suppressing market interest rates, I have long felt that it would be left to the currency markets to act as an escape valve for any investors wishing to express an opinion about the UK’s economic prospects (see Jim Roger’s gloomy assessment below) – because the currency markets are too deep and liquid for even Mark Carney to manipulate. But it does seem as if gilt investors are now starting to express unease about the UK’s inflationary outlook and sovereign creditworthiness.
Analysts at HSBC commented:
The question we have asked hundreds of investors throughout the world is ‘do you want to buy a currency that has massive twin deficits [in the form of the government budget and national current account] with an unknown political direction and for that risk you can get zero rates ?’ We should have some kind of risk premium.
Until recently, that risk premium was not available in the bond market, so sterling got whacked instead. Now both UK bonds and the currency are getting hit. I have no strong conviction about our currency now – in large part because I think euro bulls, for example, are delusional – but I still hate prospects for gilts and sterling denominated bonds with a real passion.