0% Interest Rates !

Zero interest rates are on their way. They could be days off in Japan, weeks off in the US and, maybe, months off in the UK. The decade beginning in the year 2000, and finishing in 2010, may be known as the noughties for more than one reason.

Yesterday, the Fed cut interest rates to 1 per cent. And its chairman, Ben Bernanke dropped a big hint they will be cut again. “Downside risks to growth remain,” said the official Fed statement, and then talked about “levels consistent with price stability.”

Rumours that the Central Bank of Japan is set to cut rates back to zero have been doing the rounds for a couple of days now. In fact, it is these rumours that have lain behind the surge in stock markets around the world over the last couple of days, with the Dow enjoying its second-highest daily rise ever, on Tuesday, and the FTSE 100 its third-best day ever, yesterday.

And what about the UK? Yesterday, Capital Economics said: “Extraordinary circumstances require extraordinary actions. With the current recession likely to be deeper than that in the early 1990s and the credit crunch impairing the effectiveness of monetary policy, we now expect UK interest rates to fall to an all-time low of just 1 per cent.”

Earlier this week, former MPC member and extremely illustrious economist, Charles Goodhart, told Channel 4: “Interest rates will go down from now, by how far and how fast nobody knows… They could go to zero. They went to zero in Japan in the 1990s when the Japanese had a recession or depression which went on for a long time and was quite severe.”

Irish Government Extends Guarantee to I of M.

Further to our previous postings in relation to the security offered by The Irish Government we are pleased to see today's announcement lifting some of the uncertainty floating around just now.

The Irish government has confirmed four banks and two building societies will be protected by its bank guarantee scheme safeguarding offshore savers in the Isle of Man.

Irish Minister for Finance Brian Lenihan signed the order on Friday night after the six lenders agreed to be in the scheme, which will protected 100% of depositors’ savings. The guarantee makes the protected Irish banks more attractive than other Isle of Man deposit takers, who are only covered for the first £50,000 by the Manx Depositors Compensation Scheme. ‘The guarantee has as its central objective the removal of any uncertainty on the part of counterparties and customers and gives absolute comfort to depositors and investors that they have the full protection of the state,’ said Lenihan. The four Irish banks with Isle of Man branches protected by the scheme are:

• Anglo Irish Bank Isle of Man
  Bank of Ireland Offshore
  Irish Permanent International
  Irish Nationwide Isle of Man

Annuity Rates Set To Fall

We have seen annuity rates decouple from bond markets in recent months, as annuity providers have held back from passing on the full extent of rising yields. The benchmark rate for a 65 year old male is currently 7.7 per cent, we think that there is a strong argument for rates dropping well below 7 per cent over the next year.

Along with gilts, corporate bonds form the underlying investments used to pay annuities. With the credit market seizing up, the yields on corporate bonds have spiralled to unprecedented levels and this in turn has allowed insurers to increase annuity rates. Government measures to inject liquidity in to the market and kick start lending again will hopefully bring interest rates down. When the market does start functioning again, bond prices could jump as yields drop back. This is likely to bring downward pressure to bear on the annuity rates.

In addition, we believe that increasing longevity is constantly forcing insurers to lower rates as annuities will have to be paid for longer. Annuities are also undergoing a rapid evolution towards an individual pricing approach where the actual rate is dependent on the investor’s health and lifestyle, as seen by the rise of enhanced and postcode annuities. This drags down rates for the healthy and those living in more affluent neighbourhoods.

In as much as it is possible to be certain about anything at the moment, there appears to be a strong possibility that annuity rates will fall over the next year.

Value in Corporate Bonds ?

BlackRock's head of credit Paul Shuttleworth believes corporate bond default rates are likely to rise despite the UK Government's huge recapitalisation of banks improving sentiment towards the asset class.

However Shuttleworth thinks the current yields on corporate bonds are far too pessimistic and that the asset class is offering good value over the medium term. Shuttleworth said that a proliferation of new bond issues from financial companies was now likely as until recently the prevailing conditions had made the issue of new bonds almost non existent, but the deteriorating economic environment would make further company failures and subsequent defaults more likely. He said: 'Investor sentiment changed for the better once it became clear that the UK Government's bank recapitalisation would leave bank bondholders intact.'

'As the British lead has set a global template it is likely that sentiment will continue to improve but the flies in the ointment are that we will see financial institutions issue more bonds in the future - which they haven't been able to do until recently. With a slowing global economy company failures and subsequent bond defaults may increase.'

Despite this, Shuttleworth believes the corporate bond sector has stabilised since the recapitalisation and that the current default risks are priced in. He said: 'Historically the worst cumulative default rate for 'investment grade' bonds (BBB and above) over any 10 year period since data started being collected in the early 1970s, was 5.2%. The average default rate over any 10 years is actually 2%.'

He added that the yields currently being paid out annually on corporate bonds were pricing in a 50% default rate over the next 10 years for financials, and 30% for non-financials which he sees as hugely pessimistic. 'The pessimism in the pricing of corporate bonds is overdone - over the medium term they offer real value

It has been reported in recent press articles that Norwich Union may abandon plans to pay windfalls to its policyholders after the stock market slide slashed the value of its spare capital. The pay-outs were to be made by NU's parent Aviva from surplus capital that had built up in its with-profits funds over many years. Last year, the insurer approached policyholder advocate Clare Spottiswoode to help decide what to do with the spare cash. Spottiswoode lobbied hard for significant payouts to policyholders and Aviva said in July it would hand out windfalls averaging about £1,000. But the plan could be scrapped after the crash in stock market values hit Aviva's capital assets and eroded the pile of surplus capital.

We will continue to monitor the position and keep clients informed however in the interests of protecting terminal bonuses and in the knolwedge that TB's are already starting to fall due to the prevailing economic climate more immediate action may be necessary in certain circumstances.

Half of UK adults have no pension plan

Nearly half of adults in the UK are failing to contribute anything towards a pension scheme, despite the continued trend of people living longer. New research shows that 46pc of the working population aged over 18 are not setting aside any money for pensions. A similar number (45pc) of people aged between 55 to 64 are also not currently paying towards their retirement funding.

The Society of Pension Consultants, the representative body for the pensions industry, which commissioned the research, said it was "worrying" that virtually half of the working country is failing to save towards retirement, especially as the credit crisis had eaten into the value of homes.

What Next

Having returned from a weeks vacation I am now busy trying to bring myself up to date with the events of the last few days albeit the news was never that far away between e-mails and television. Of all the numerous articles appearing in our in-boxes the following link is perhaps one of the more opinionated I have had the pleasure of reading. As we grapple with the events of the past days and look for signs of where things are moving next we will try and post as many of the "professional" articles we come across for those interested in finding out more from those directly involved in market decisions.

To read more follow this link: -

http://defaqtoblog.com/iabn/2008/10/15/what-next/