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LDI Market Bulletin - April 2024

A comprehensive market update on interest rates, inflation, and bond markets for institutional investors.

02/05/2024
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Authors

Phil Howard
Head of LDI Solutions Management
Sunil Patel
LDI Solutions Manager

Markets dashboard

LDI Bulletin - April 2024

Source: Schroders, Bloomberg. Data is shown as at close of business market conditions (4.15 PM UK time for sterling markets) Yields shown are zero coupon unless otherwise stated. 1 bps is 0.01%.

Market commentary

Backdrop

UK inflation falls in March while wage growth remains strong

Annual UK Inflation fell to 3.2% in March, down from 3.4% in February, according to Office for National Statistics (‘ONS’) data released on 17 April 2024. The annual rate of price increases in the UK fell to its lowest level since 2021, although a greater fall in inflation was expected. Conversely, annual growth in average weekly earnings, including bonuses, held steady at 5.6% in the three months to February 2024. Furthermore, there was a 0.3% increase in the annualised unemployment figure to 4.2% over the same period.

US inflation rises

US inflation rose to 2.7% in the year to March from February’s level of 2.5%, according to personal consumption expenditures data announced on 26th April, just exceeding economists’ inflationary expectations. Price rises were fuelled by rising petrol costs linked to geopolitical tensions in the Middle East. The news is likely to come as a blow to US President Joe Biden, who would have hoped for a pre-election rate cut to boost his prospects in November’s US election.

UK economy grows in February

UK Gross Domestic Product (‘GDP’) grew by 0.1% in February, providing further hope that the UK is no longer in recession. The growth figures announced by the Office for National Statistics (‘ONS’) on 12 April show that the UK’s economic growth was boosted by production and manufacturing. The UK Chancellor cited February’s growth data as a “welcome sign that the economy is turning a corner”. Despite this growth, the International Monetary Fund (‘IMF’) downgraded its forecast for UK growth.

Inflation remains sticky across the Eurozone in April, despite growth

Eurozone inflation remained steady at 2.4%, ending a 17-month period of almost continuous decline. On the other hand, Eurozone GDP grew by 0.3% in the 3 months to March 2024, exceeding economists’ expectations. This represents the fastest economic growth for the region since Q3 2022.

LDI desk commentary

LDI solutions and portfolio management

Mixed signals from Bank of England (‘BoE’) officials about rate cuts

Senior BoE officials appear divided regarding the timing of UK interest rate cuts throughout April 2024. Deputy BoE governor Dave Ramsden argued that “the balance of domestic risks to the outlook for UK inflation” had “tilted to the downside” since the publication of the BoE’s most recent monetary policy report in February. However, the following week BoE Chief Economist Huw Pill emphasised the continued need for “restrictive” monetary policy until there was further evidence that inflation had been brought down sustainably. Monetary Policy Committee members Jonathan Haskel and Megan Greene have also echoed Pill’s sentiment over the month.

Inflation data cools prospect of rate cuts in UK & US

Sticky inflation figures decreased the likelihood of imminent interest rate cuts in the UK and US. Following the release of the UK’s March inflation data, swap markets moved to predict that rates would not be cut until September. In the US, rising prices and lower-than-expected annualised growth figure of 1.6% for Q1 2024 lead to traders rating the chances of the Federal Reserve (‘Fed’) cutting rates at its September meeting to 75%.

Regulators of LDI Pooled Funds announce measures for GBP pooled LDI funds

On 29 April 2024, the Commission de Surveillance du Secteur Financier (‘CSSF’) and Central Bank of Ireland (‘CBI’) announced that they will require a minimum yield buffer within any GBP LDI fund (multi-client or bespoke fund of one) to withstand at least a 300bps rise in interest rates. There is a 3-month implementation period for LDI managers to introduce the new minimum yield buffers, ending on 29 July 2024. All UK LDI managers will need to comply with the new measures for any pooled LDI funds regulated by these entities.

Market data: Bond markets and currencies

LDI Bulletin - April 2024LDI Bulletin - April 2024LDI Bulletin - April 2024LDI Bulletin - April 2024

Source: Schroders, Bloomberg. *At the money. Data is shown as at close of business market conditions (4.15 PM UK time for sterling markets)

Equity market backdrop

LDI Bulletin - April 2024

Source: Schroders, Bloomberg. Data are shown at the close of business market conditions.

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Authors

Phil Howard
Head of LDI Solutions Management
Sunil Patel
LDI Solutions Manager

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