Market review
The third quarter of 2024 saw the long-expected turn by the Bank of England (BoE) towards the rate cutting cycle, with its first 25 basis point cut in August. However, the path has not been smooth. After falling close to the 2% target in early summer, inflation data for July, released before the Bank’s rate cut, showed inflation had ticked back upwards to 2.2%, due to energy price cuts dropping out of the figures.
The inflation uptick was in line with our expectations and the BoE also appeared comfortable with the data. However, there has since been a series of mixed messages from the Bank about the pace of future rate cuts, and financial markets have also had to contend with uncertainty over the first Budget from Labour Chancellor Rachel Reeves.
It has long been our view that the path towards lower rates would be uneven and occasionally punctuated by unsettling data, and our strategy has been to take advantage of any short-term fluctuations in fixed income markets.
Fund activity
It has been a quiet summer for issuance of short-term bonds. As a result, we have been reinvesting maturing short-term positions into new ones to take advantage of the elevated interest rates available in maturities of a year or less.
In September, we enhanced floating rate note spreads on the fund by taking advantage of some three- and five-year covered floating rate note issuance, selling a shorter position in the same name and gaining 30 basis points of spread on each trade.
Outlook
After the Budget announcement on October 30, and assuming it contains no unexpected shocks, we expect the BoE to renew cutting rates, with a further reduction of 25 basis points in November. We expect this to be the last rate cut of 2024.
In 2025 there will be ongoing uncertainty about where the neutral level for interest rates lies and we expect a persistent debate in the market about whether the Bank is moving too slowly or too fast.
There is scope for many more interest rate cuts, but the Bank will take a cautious approach to avoid over- or undershooting. While the market is currently pricing in as many as six cuts over 2025, we expect there to be three or four. This is likely to create further opportunities to buy value when prices deviate from realistic expectations.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
