Patrick Hawkins, a director at Savills Financial Consultants, explores what treasurers make of the state of the financial markets and what pointers there are for housing association finance teams
“Nothing in gilts markets in the past 35 years – not the UK’s ejection from the Exchange Rate Mechanism, 9/11, the financial crisis, Brexit, COVID or any Bank of England move – compares with the price moves in reaction to the chancellor’s Mini Budget.”
So ran Toby Nangle’s leading article in the Financial Times on Monday 29 September, in the immediate wake of chancellor Kwasi Kwarteng’s speech.
As we all saw, the anguish in the investment community was widespread and reflected in the sharp rise in the cost of government debt (gilts), but the pension fund industry felt the pain acutely.
The spike in gilt yields undermined final salary scheme values and some pension funds were reported to have been forced to sell gilts to meet cash margin calls.
Central bank action
The Bank of England intervened to prevent what might otherwise have been a vicious downward spiral. It suspended its (anti-inflationary) programme to sell gilts, while at the same time it pledged to buy long-dated gilts at a rate of up to £5bn a day for about two-and-a-half weeks (which economists worry may fuel inflation!).
What we observed in the market was a dramatic spike in gilt yields and interest rates, and a sterling sell-off in the foreign exchange markets – especially against the US dollar.
The Bank of England’s subsequent action – and to a lesser extent the government’s reversal of its decision to remove the 45 per cent tax band – allowed gilt yields, interest rates and the currency to settle down a bit, but not recover fully.
Cost of debt
At the time of writing (4 October), the 30-year gilt yield is at 3.90 per cent – still higher than it was a decade ago.
The short sterling futures market (a proxy for the Bank of England’s bank rate) is trading at 5.35 per cent for June 2023, and secondary spreads in the housing association bond market are 15-25bps wider on the week.
None of this is helpful for housing associations which are already facing the challenge of squeezed rental income in 2023-24.
And it’s not as if they didn’t have enough on their plates already, having to grapple with rampant inflation, rising costs, fire safety and decarbonisation, not to mention providing affordable, safe and comfortable housing for their tenants.
Some actions to consider
So, what do we treasurers make of the state of the financial markets and what pointers are there for housing association finance teams?
With the chancellor to make a further financial statement this year, where full tax and spending plans will apparently be set out, it seems likely the financial markets will continue in a state of uncertainty for the next couple of months.
In the meantime, planning well ahead of time, while having options open, is clearly the key to successful treasury strategy at present.
Patrick Hawkins, director, Savills Financial Consultants
The Social Housing Annual Conference is the sector’s leading one-day event for senior housing leaders, which delivers the latest insight and best practice in strategic business planning. The conference will provide multiple viewpoints and case studies from a variety of organisations from across the housing spectrum, including leaders in business and local and central government.
Join your peers for a full day of intensive, high-level learning, networking and informed debate addressing the most crucial topics surrounding finance, governance and regulation to help the sector understand and manage the pressures it faces.
Find out more and book your delegate pass here.
RELATED