For real yields, while there was a move down at the short end (accompanied by higher inflation expectations), medium and longer dated real yields did not change much over the quarter. In line with these moves, the breakeven inflation curve shifted up across the curve.
Reported inflation fell in January and February versus last quarter’s readings, however the war in the Middle East led to an increase in inflation in March. Year-on-year CPI was 3% in January and February, rising in March to 3.3%. While RPI was 3.8% and 3.6% in January and February respectively, rising to 4.1% in March. The war in the Middle East is expected to be inflationary and the market has gone from predicting two Bank of England rate cuts for the rest of this year to none.
Credit spreads (versus swaps) have increased over the quarter across all rating bands. While the increase was around 25 basis points, spreads remain low compared to long-term history.
