MARKETS PREP FOR TIGHTER POLICY
October was marked by an uplift in market rates as inflationary pressures amid strong demand, sustained supply chain congestion and shortages raised the potential for quicker tightening by major central banks. In fixed income markets, this was generally reflected in flatter yield curves as shorter-dated bond yields typically rose more sharply.
Central bank tightening has been on the horizon for a while and in October the US Federal Reserve indicated it would soon start to slow, or “taper”, its monthly asset purchases. The Fed also acknowledged high inflation would be less transitory than it expected. Elsewhere, markets moved to price in a rate hike by the Bank of England at its November meeting. And while the European Central Bank flagged that rate hikes are a long way away, markets began to price in the potential for a move before the end of 2022 – euro short-term rates were largely unchanged, unlike in the UK where LIBOR reflected increased rate hike expectations.