Year in Review of the Treasury: Inflation, Regulations, Borrowing and Investments


It has been an eventful year for the Treasury as it adjusted to the pandemic and the changing economic landscape. David Blake takes a look at the big cash events of the year.

2021 has certainly been an eventful year for everyone, including those in the world of cash management. Treasurers and advisers juggled potential regulatory changes, volatile gilt markets, varying interest rate expectations and everything in between.

This presented a wide range of opportunities and risks in investment and leverage strategies. So with that in mind, let’s refresh our memories of the past twelve months.


Economically, 2021 has been dominated by the effects of both the coronavirus and vaccine distribution. Despite the UK experiencing its third lockdown in early 2021, rapid vaccine distribution had already started and optimism was growing for a return to normalcy despite the continuing threat from the Delta variant.

This was reflected in financial markets by the theme of reflation, which saw gilt yields rise sharply until February and left negative rate expectations confined to the past.

The removal of social restrictions characterized spring and early summer, significantly boosting UK growth rates after the economy gradually reopened.

Andrew Bailey, Chairman of the Bank of England and the MPC. Photo: Bank of England, Flickr

Inflation expectations have picked up as global supply chains stretched under the pressure of a coordinated increase in demand. Monetary policy makers have tried to emphasize that much of this pressure was transient and therefore would ease over time, a view that ultimately appeared to be accepted by financial markets.

However, energy costs jumped as autumn approached and raised inflationary fears. Driven by the uncertainty among policymakers about the threat of more persistent inflationary pressure, rate expectations have risen sharply, particularly in the UK.

The risk of increased unemployment had apparently been avoided by the leave scheme; in fact, the focus was on labor shortages, with the EU’s withdrawal making matters worse.

While economic growth was expected to slow as high inflation eroded household spending, the bank rate was strongly expected to be raised to tackle medium inflationary pressures. term. The Monetary Policy Committee nearly disappointed markets with a rate hike in November, even though it seemed purely a temporary reprieve.

The onset of winter saw an increase in coronavirus cases in Europe, leading to increased social restrictions. The markets seemed little phased, until the emergence of the Omicron variant.

Anecdotal evidence suggests that UK households and businesses have already reacted to the new variant, and while another year-end foreclosure seems less likely, a slowdown in economic growth towards the start of 2022 is almost certain.


2021 was also an active year in terms of potential changes in the regulatory landscape for treasurers of local authorities.

Prudential Code

CIPFA’s consultations on the Prudential and Cash Management Codes were headlined, with the process launched at the start of the year, feedback published in June and a second consultation on the proposed changes published. in September, the final updated codes are expected very soon.

The prudential framework has been revisited to cope with continued borrowing by some local authorities for business investment purposes, and the new code will make it clear that borrowing for the primary purpose of obtaining commercial performance is not something that local authorities should undertake.

One related area that has generated thumbs up here and elsewhere is the potential inclusion of mutual funds in the definition of business investments, where they were previously viewed by most as long-term cash investments. .

Other changes such as the inclusion of proportionality as a code objective and the liability test becoming a prudential indicator could mean that more details will be added to the treasury documentation next year, but for many authorities it is will simply be a formalization of the best practice already in progress. regular.

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MHCLG, so to speak, now DLUHC (Department for Leveling, Housing and Communities) has announced plans to improve the capital funding framework for local authorities in England, again with concerns arising from borrowing for business activities.

Many of the actions announced were quite general and the most important changes were those related to legislation, such as with regard to borrowing limits and MRPs. For now, it is only on the subject of MRP that the department has issued a consultation, which is open until February 2022.


On the borrowing front, the start of the year was dominated by discussions over the new HM Treasury Public Works Loans Board (PWLB) rules, with initial confusion over how to interpret the waiver. rules as revised guidelines were released in August. During this period, demand for PWLB loans remained low as uncertainty and Covid’s cash surpluses deterred treasurers from pressing the borrowing button.

Lender’s Option and Borrower’s Option (LOBO) loans continued to grab the headlines. In March, a High Court judge dismissed a case bought by several authorities against Barclays Bank for LIBOR manipulation. The High Court judge dismissed the case, saying it had “no real prospect of success.” LOBO prepayments have made a resurgence, with authorities once again getting rid of these loans to generate savings and reduce risk.

Photo: Her Majesty’s Treasure, Flickr, CC

The finance market continued to evolve during the year with the issuance of Green Gilts by the UK government, the announcement of its ESG framework by the Municipal Bond Agency and proposals for a short-term loan product. developed with Arlingclose and backed by commercial paper.

In Wales, the arrival of the General Power of Competence could herald the arrival of innovative financing solutions, including interest rate swaps.

We saw the introduction of the UK Infrastructure Bank (UKIB) in June. UKIB is charged with investing in ambitious infrastructure projects aimed at reducing emissions, helping the transition to a net zero economy, as well as creating new opportunities across the UK.

As December 31, 2021 approaches, long-term loans and PFI contracts with LIBOR references now require special consideration, with lender approval required to replace references to the outgoing benchmark with SONIA.

We are coming to the end of the year with long-term PWLBs at all-time lows (at the time of writing), as bonds reflect on the odd shape of the yield curve and value the ‘benchmarks of the liabilities ”in anticipation of the revised Prudential Code.

Perhaps the new year will require a few more authorities to consider debt reduction strategies; maybe the UK Treasury will consider reducing its borrowing / repayment gap in the context of the revised codes, or is this just wishful thinking?


2021 has also been a busy year for investors with a lot to think about as the year draws to a close.
The European Securities and Markets Authority launched a consultation in March 2021 on potential reforms to the EU’s MMF regulation.

The structure of Low Volatility Money Market Funds (LVNAV) is also under discussion as financial turmoil drove many NAVs close to breaking their 20 basis point collar. This would have meant that any funds that violated the collar would have been converted to VNAV funds, potentially resulting in losses for investors. The proposed reforms could have important implications for investors in the coming years, for example increased protection by increasing liquidity buffers.

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Local authorities have been inundated with cash throughout the pandemic thanks to Covid-19 grants from the central government. Rates in the “LA to LA” market have been trending to historic lows for many periods of time. At one point, local governments could borrow one-year money at 0.1%. Many authorities used the Los Angeles market to meet their short-term borrowing needs as the rates were at very attractive levels, especially compared to other sources of borrowing such as the PWLB. As we move into 2022, there has been a slight shift from local to local levels as grants are paid back and money is taken out of the system.

Asset prices rebounded in 2021 as the rollout of global immunization programs breathed new life into financial markets and increased investor confidence in a strong recovery. However, the Omicron variant threatened to halt this progress.

Equities (as measured by the FTSE All Share) generated a return of 4.6% over the 9 months to 2021.

Bond funds, generally viewed as a defensive asset class, have generally performed well throughout the pandemic. They (as measured by the Bloomberg Sterling Corporate Value Unhedged GBP) generated a return of 1.9% over the 9 months to 2021. However, the current inflationary environment may weigh on performance.

Real estate values ​​rebounded after a difficult 2020, May 2021 was the 7th consecutive monthly increase in capital values. The retail sector continued to struggle, but retail warehouses and industrial / distribution assets performed strongly in 2021. Real estate (as measured by UK All Property IPD income Index) generated a return of 4% over the 9 months to 2021.

As the year draws to a close, the pandemic has moved into a more volatile phase, presenting uncertainty for the year ahead. While we have more clarity on future policy, the direction of the pandemic will of course affect treasury strategies. However, we remain hopeful that the worst is over and look forward to a brighter and bolder year 2022.

I wish everyone a Happy New Year.

David Blake is a director at Arlingclose.


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