Patrick Coffey 00:00

Welcome back to the Barclays Brief podcast. It's Patrick here. It's been one of those weeks where the entire rates market feels like it's been picked up and shaken. Inflation shocks, energy moves and geopolitical headlines are all colliding to force a dramatic rethink on the path for interest rates is playing out most acutely in Europe, and particularly in the UK, where market expectations of the Bank of England cutting rates just a few weeks ago have flips to pricing interest rate hikes as inflation and growth concerns collide.

So it's Monday, the 23rd of March, 5 p.m. here in London, and another volatile day in markets has just ended. We saw markets open sharply lower and then reverse those trends after President Donald Trump social media post, which led to dramatic changes and another increase in volatility. So how do you trade through that kind of volatility? What signals really matter and most importantly, what comes next to help us make sense of it?

I'm thrilled to be sitting opposite Hamza Hoummady, head of EMEA Rates Trading in our markets division. Hamza. Great to have you with us today. Thanks for joining the Barclays brief. 

Hamza Hoummady 01:13

Patrick, thanks very much for having me. This has been completely insane weeks and the past three days in particular. So very happy to be here and talk about it.

Patrick 01:23

Okay. So how long have you been doing this job, Hamza? 

Hamza 01:26

I've been doing it for 20 years and I've never seen anything like this, actually. 

Patrick 01:28

Okay, so it's been a dramatic day. It's been an even more dramatic month. At the simplest level, what on earth is going on in European rates? 

Hamza 01:37

It's just unprecedented rates, volatility hitting every corner of our market.

Europe is really at the epicenter of this conflict. We all know it has high dependencies on energy prices. And so it's been hit by headline after headline. And it's been going on for four weeks. Last week we had some new information coming in the system because major central banks have met, and Bank of England, as well as the European Central Bank, made it very clear that they will be proactive when it comes to fighting any inflation.

And I guess I think what makes it quite hard, you know, as a trader is there's so many headlines. It's exhausting because market is just reacting extremely fast on headlines that pop up. And the traditional frameworks are more slow moving, especially when it comes to front end rates, because monetary policy is a serious thing and it relies on economical data feeding through.

But yeah, we don't have this luxury anymore. And so central banks are very keen to show that they can keep inflation expectations anchored and that they will move fast if needed. 

Patrick 02:37

Yeah. Last week we saw, eight major central banks report. Only one of them, the Bank of Australia, hiked rates. The rest kept rates flat. And yet the volatility in the market and rates was, as you said at the start, insane. We've seen UK yields move far more violently than Germany and the US. So what's driving that divergence. And why is it that the UK is so sensitive to this inflation shock?

Hamza 03:03

Who would have thought that you would get a 50 basis point move with the nine zero vote from the Bank of England? I think it was very hard to predict the magnitude of it, but also the fact that it happened again on Friday and today we had a 50 basis point reversal.

So that's almost three days of 50 bips move. Since you go back to your question, but specific about the UK is it has a less diversified energy source. So oil gas shocks will impact UK CPI harder. And that has fed through the front end pricing. But also at the long end pricing. Ten year gilts have reached 5%, which are levels not seen since 2008.

And there is almost a 10 or 15% probability that the UK base rate will be above five and 5% by the end of the year. 

Patrick 03:46

And of course, this has a knock on effect both on businesses and households. So you know, if you look at mortgage rates right now, they've moved very sharply. 

And your point on UK energy prices is so important. UK power prices are set off the marginal units, which most of the time is gas, and because the UK has far less gas storage than countries like Germany, for instance, the recent surge in gas prices mean a shock like this hits the UK especially hard. Okay, so we talked about major volatility, 50 basis points moves one day and then the next. Do you want a market crisis like this? I'm always really interested in the historical parallels. You mentioned 2008 just then. I've read about 2008, 2011, 2020 with Covid, 2022 with the inflation shock, all of those have sprung to mind. Which episode, if any, is the closest guide to what we're seeing right now in the rates market in your mind?

Hamza 04:44

I think it's quite hard. I keep flip flopping between three years and they're all actually quite, quite different. But you have 2022, which is very fresh in everyone's mind. And that's the year that brought back the inflation supply shock. But then I also look at 2008, which is almost when I started, and I remember that year quite well.

And I think, you know, there are some similarities because we're late in the cycle, but we're talking about higher rates. And so it's not a coincidence that all these rates are back to 2008 levels. And the one I find the most interesting is 1997. And I wasn't trading then, and I think many people have not seen it first hand, but it's just a market that reminds us that you can have very low levels of volatilities, and that can give confidence to investors to increase leverage at the wrong time.

And then an exogenous shock can come up and that can escalate. And then you see three days of 50 basis point move every day. 

Patrick 05:39

Okay. So you obviously you have a background in volatility in options. I want to come to that in a moment. But I'm particularly interested in what's unique about today. These moves are unprecedented. What's unique about 2026?

Hamza 05:52

So you know what this crisis has a lot of headlines, and it's interesting that it comes also, you know, in the era of AI and everyone is trying to process the headlines, but we have the luxury, you know, as a market community, to have access to very powerful models that can process all these headlines. And that has definitely improved decision making speed.

But also, I think there is a risk that this has been enhancing market volatility. So it's almost you know, AI has an impact on the economy, but also on the volatility on the financial ecosystem. 

Patrick 06:29

It feels like a sort of self-fulfilling loop there, a bit weird.

Hamza 06:32

It is weird. Yeah. 

Patrick 06:33

Well, talk to me a bit about that, because markets have obviously flipped from expecting cuts to pricing imminent hikes, particularly in the UK and Europe.

How much of the recent moves were exacerbated by crowded positioning? Because when we came into this year, it seemed pretty, pretty generic. Everyone thought interest rates would go down, the market would be broadly okay. AI would be the dominant macro narrative. But what's happening on positioning today? And also talk to me about rates volatility it’s been grinding lower for the last year, but it's suddenly spiked.

So all of these things are kind of colliding at the same time you know how do you see it? 

Hamza 07:09

Yeah. So positioning was very heavy when the conflict started, especially on the front end rate expectations because as you said, the dominant market narrative was AI. And maybe there's uncertainty around what AI does to the economy. But there was a consensus forming that there's potential a higher unemployment rate.

And the reduced growth will drive central banks to lower rates. And so this had to be in front. And now the distribution of rates is open on both sides. We could have very low rates, have very high rates and these unwinds have accelerated the repricing. But also central banks have made it clear that they don't want to run the risk of being behind the curve.

So again I'll go back. It's exceptional to see so many 50 basis point moves intraday. These are moves that usually we see over the course of the year. And we've seen it three times in three days. I think you know if you want an image around this you have two massive waves. One is an AI wave that's coming from the US.

The other one is an energy shock wave coming from the Middle East. And they just collided in the middle of the Atlantic. And we are feeling the ripples of it in the UK and in Europe.

Patrick 08:15

I feel like they didn't collide in the middle of the Atlantic. I feel like it collided, slap bang, where we live right now in London and Europe.

Hamza 08:23

It collided in Canary Wharf.

Patrick 08:25

Exactly. Okay, so you've got those two waves colliding. I love that image. Maybe that should be the title of this podcast. We've got this inflation shock. We've got the AI narrative, which could be deflationary on a medium term view. Put it all together for us. How do you trade this position? Yeah. What are clients talking to you about in terms of cross asset trading opportunities in this environment today right here?

Hamza 08:47

Yeah, there is a very big disconnect between rates markets and equity markets. The amount of volatility that we see on the rates side, I think that's almost a mechanical reaction to commodities impacting inflation, impacting rates. And even though it's a big move you can rationalize it. But what's very hard to comprehend is why is this not reflected in equity prices or equity valuations.

And it's almost like the equity market is struggling between the Trump put, which is this impression that eventually there is a backstop to the S&P for example, and also a nascent put coming from the Middle East. And the equity market is long one and short the other. And you don't know which one of the two is going to win.

And I like this duality. It's like the two waves, the yin and the yang, which one actually will impact the equity markets more. So if you're of the view that we can go back to the previous equilibrium in prices, then I think the rates market does offer very good opportunities to fade the rates increases. But if you're of the view that this conflict can persist and it just joins a succession of supply shocks and the fragility of the system is actually harder and harder to fix, you know, you can imagine having oil and gas prices making their way to core inflation.

And we have seen clients protect against these scenarios by buying inflation and buying rates volatility. 

Patrick 10:06

Well, there's a huge amount to digest and think about there, Hamza. Thank you for joining us. It's been another long day in markets. 

Hamza 10:15

Long weeks!

Patrick 10:17

Long weeks, long months long year! But it's been great to have you all and and I look forward to catching up soon.

Hamza 10:21

Thanks very much, Patrick. 

Patrick 10:23

It's been great to be joined by Hamza today. My three key takeaways are firstly, we're living through unprecedented moves in the rates markets, particularly in the eurozone and the UK. Secondly, whilst there are historical parallels and we talked about ‘97, 2008, 2022, none of them quite cut it. And in part that may be because of the usage of AI in 2026.

And finally, the path from here is still not clear. Markets still have to grapple with the duality of the AI and inflation narratives that have suddenly collided. I hope you've enjoyed this episode of The Barclays Brief. Do hit subscribe and we'll see you again next week.