One of the major themes we have been talking to investors about recently has been the changes wrought since the onset of the global financial crisis a decade ago. It is often forgotten, for example, that interest rates in the UK stood at 5.50% at the end of 2007, that 10 year UK and Greek government bond yields were nigh on identical and that the Bank of England had a balance sheet of just £77 billion. But what did the sterling corporate bond market look like?
Although the economic outlook for the UK in 2018 is mixed, we believe the consensus is too pessimistic on growth. The global economy is now firing on all cylinders – which will benefit the international-facing UK market – and we believe the risks to growth, inflation and interest rates are all to the upside, in the UK as well as globally.
We have often talked about the extraordinary bull market we have witnessed in bonds in recent history, with 10-year UK gilt yields falling from 15% in 1974 to just 1% today. However, the long-term data shows that – although 2016 and 2017 have seen the lowest yields in the history of the UK gilt market – they are not that anomalous. Indeed, the incredibly high yields of the 1970s and 1980s look to be the anomalies in this context.