Update on the Impact of Increasing Long-Term Interest Rates

Following increases to long-term interest rates during Q1 2021, we provided a fixed interest update highlighting the impact of increasing long term interest rate risks on MetLife mixed asset investments and fixed interest investments. This is available here.  

Overall, during 2021, on the back of waves of optimism and pessimism on news of Covid, inflation, and the reopening of global economies, fixed income yields were volatile.

2022 has seen even greater levels of volatility and there is an acceptance from the Bank of England (BoE) that high inflation will be with us for longer than initially expected. In August the BoE Money Policy Summary stated that:

“Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”

In an effort to control rising inflation, at its meeting on 3 August 2022 the BoE Monetary Policy Committee voted to increase the UK Bank Rate by 0.5 percentage points, to 1.75%. On 22 September 2022 they increased base rates by a further 0.5 percentage points to 2.25%. The impact of rising bank base rates has pushed up yields throughout 2022 and this has been exacerbated since the UK Government’s mini-Budget on 23 September which resulted in further increases in long term yields. Current market sentiment is that the BoE will make further base rate increases.    

The increases during 2022 is shown by the changes in the 10-year gilt yield that has increased from just under 1% at the start of 2022 to over 4% in the last week of September. The increases throughout 2022 have been significant, and this is reflected in the negative performance of existing UK fixed interest assets, which have seen significant falls in valuations for existing corporate bond and gilt investments. This can be seen in the two ABI sectors shown below. If base rates continue to rise, then we may see further increases in long term yields. 

Year to date returns to 26 September 2022

• ABI UK - UK Gilt-Pen sector                                      -28.41%
• ABI UK - Sterling Corporate Bond-Pen sector      -20.81% 

Details of the performance of the MetLife funds are available here. 

Market volatility will impact fund values but the capital and income guarantees provided by the MetLife Secure Capital Option and the Secure Income Option will continue to perform as described in our product literature.