Sterling Bond Market Falls as Rates Rise, Forecasting UK Credit Crunch

The U.K. credit market isn’t doing so well, Bloomberg reported Saturday (May 28), citing numerous troubles.

A bond market seeing double-digit losses is stressing some companies in need of cash, Bloomberg wrote.

The firms are up against rate increases from the Bank of England, a cost of living crisis and the highest inflation in decades, along with low productivity and the Brexit fallout.

The economy in the U.K. will likely shrink by 0.4% this quarter, and a Bloomberg index tracking the top sterling securities, most of which are in the U.K., has fallen 11% as of last Thursday (May 26).

And the report said the market for new sterling corporate bonds, smaller than the euro and dollar markets, is almost completely stopped, with issuance by U.K.-based nonfinancial firms this year sitting at only £3.78 billion, which is the lowest number since 2016.

The report says all the bonds that can be measured on a year-to-date basis are down in 2022, with consumer credits being the biggest losers, dropping 13%.

Because of the threat of stagflation, there’s more volatility for credit, with a measure of market swings for sterling high-grade corporate bonds being the highest it’s been since August 2020. So tapping the market is a challenge — and bankers have become nervous about committing to moves like mergers and acquisitions. Bloomberg notes that if the markets were less volatile, banks would likely provide cash.

See also: UK Credit Card Interest Rates Surpass 21%, Highest Since 1998

PYMNTS wrote last December that the U.K. credit card interest rates were at new highs, the highest they’d been in two decades.

The Bank of England reported that the average annual interest rate on credit cards is now 21.49%, as compared to the base rate of 0.1%.

Michael Donald, an ex-director of Visa U.K. and founder of ImageNPay, a digital pay app, said it would be hard for the financial industry to justify the high interest rate because of the low base rate. He added that consumers should look at whether they have to have debt on a credit card when personal loans could be gotten for lower interest rates and with numerous pay options available.