We are not under pressure to buy bonds
because they are green. Ben Clissold, USS Investment Management
that they have discovered what they can do with this. There will not be an inflation or wage number that makes the market freak out. It will be as yields rise we get evidence that economies are coping and there is a higher resilience to rates than we thought. We are coming off such a low base. We are in much better shape than in 2018. It is interesting to hear the views of institutional pension funds, who are in great shape. This is a market issue, a behav- ioural issue, this is an issue of a lot of risk takers never having operated in an environment of positive bund yields before. It feels behavioural with people looking over their shoulder saying it feels horribly different and they do not understand it. That is playing out in higher volatility. The pandemic fast-forwarded everything, including to the end of the cycle. I wonder whether we could have a moment where we can calm down a bit and that terms the cycle out. Then the conversation gets interesting in that it goes from how can you navigate the path to high yields to how high can yields go?
What is everyone expecting from yields this year? Reedie: No one will make forecasts because invariably they will be wrong, but there is a plausible path to materially higher rates. Lee: The Bank of England is projecting a 1.5% base rate by the
14 April 2022 portfolio institutional roundtable: Fixed Income
middle of next year. That is four quarter point rises, which is relatively mild. Reedie: The key issue is when does the terminal rate get re-ap- praised. It opens Pandora’s box. If the terminal rate is not 2.5% for five years it would allow yield curves to steepen. Freedman: Then there is climate spending, where trillions of dollars per year are needed to fund the energy transition. Tech- nically, there is a lot of supply that needs to be funded and it is going to come from debt rather than equity. Reedie: The next iteration of the fiscal response could be the cost of living. We have an energy price issue in the UK and a petrol price issue in the US. People are screaming about this and governments are stepping in. The French were talking about nationalising EDF to keep bills down. That is a direct response to these inflationary pressures, which lengthens the cycle. You are supressing costs, therefore people are better off. We have talked about the cost of living, but people are being paid more.
As wages rise in the US, let’s not forget that consumption is two-thirds of that economy. I would back the US consumer to spend every day of the week and twice on Sunday. Nash: Lower income wages are going up faster than inflation, so they still have a positive real wage return. The reasons you hear about why yields will not go up include
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