The UK sovereign debt turmoil has shocked global markets, causing big swings in US and European bonds.
“The fixed income market has always been highly correlated, but it’s definitely trailing this week,” said Dickie Hodges, head of Unconstrained Fixed Income at Nomura Asset Management. “The gold coin movement was so large that it permeated the European and US bond markets.”
The 10-year U.S. Treasury, the world’s largest and most important bond market benchmark, slumped to its highest level since March 2020 on Wednesday after the Bank of England announced emergency bond purchases to stem a plunge in UK government debt. I recorded the sun rise. These gains followed a sharp drop in global bond markets since last Friday as a massive sell-off of gold coins spread across the globe.
Analysts and investors say some of the moves in U.S. Treasuries and German bunds were driven by leveraged investors (using debt to amplify profits), leading to losses in the U.K. This was due to the dumping of easily traded assets elsewhere to cover But similar moves in the U.S. and Europe, though much more modest, also stem from the common challenge faced by most large nations: how to contain runaway inflation without halting economic growth. doing.
“The UK has its own set of criteria, but similar pressures are being felt strongly in other countries,” said Richard McGuire, rates strategist at Rabobank. “Investors are seeing the government’s ill-conceived experiment and wondering if it’s a sign of something else to come.”
Following Prime Minister Kwasi Kwarten’s package of £45bn tax cuts and energy subsidies last Friday, traders have quickly priced in a sharp rise in UK interest rates and pushed the BoE to offset the inflationary effects of fiscal stimulus. bet on the need to tighten monetary policy more quickly. Maguire said eurozone markets had “matched” and raised hopes for another rate hike by the European Central Bank next year. He added that his clients who invest in eurozone sovereign bonds now have the UK at the top of their list of questions.
Monetary policy being coordinated globally means that when one central bank changes course, others will follow, such as when the BoE decided to postpone its quantitative tightening process this week. It also means that the question arises as to whether
“In the U.S. market, we are a bunch of single-celled monkeys,” said Edward Al Hussaini, senior interest rate strategist at Columbia Threadneedle. I think it will end quantitative tightening.
Analysts and investors say the aftermath of the UK crisis will be particularly pronounced in the United States as markets are in a state of broader volatility. It is rising, and even markets that are normally very stable like U.S. Treasuries are causing unusual price volatility. Both 2-year and 10-year Treasuries are set to record record selloffs this year.
Given the historic shift in monetary policy this year, a strong market reaction is expected. But those moves are also exacerbated as uncertainty about the future direction of monetary policy has sidelined more cautious investors. When fewer investors invest in the market, price movements become even more dramatic, and some investors refer to this phenomenon as the ‘volatility swirl’.
“In moments of high volatility, everything becomes correlated,” said John Briggs, head of U.S. rates strategy at NatWest Markets.
“Objectively, what’s happening in the UK shouldn’t affect the Fed’s outlook or inflation, but it’s true that when markets move to that extent, no one is immune. Volatility is volatility. ,” said Briggs.
Two Fed officials this week indicated that the UK crisis could cause problems for the US. Atlanta Fed President Rafael Bostic said the UK tax regime and subsequent market volatility could increase the chances of the global economy slipping into recession. New Boston Fed President Susan Collins also said, “As policy tightens further, any major economic or geopolitical event could push the economy into recession.”
Gregory Whiteley, Portfolio Manager at DoubleLine, said: “It is natural that money moves between markets to take advantage of changing prices.”