Since the presentation by the British government, on September 23, of a budget marked by record tax cuts, the British bond market no longer works normally.
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When he was Prime Minister (2019-2022), Conservative Boris Johnson had given Liz Truss a nickname: “Human Grenade.” Now that she replaced him at the head of the British government, the new first minister seems to justify this term. Since the presentation of its budget, on September 23, which announced the highest drop in taxes since 1972, the British financial markets seem to have been affected by a blast which never ceases to do damage.
Tuesday, October 11, the Bank of England (Bank of England, Boe) announced an enlargement of its emergency intervention, two weeks after starting it. Its concern concerns the bond market, where volatility and tensions remain very strong, each time affecting more obscure corners of financial products. “The dysfunction of this market, and the risk of a dynamic of forced sales, pose a serious risk to British financial stability”, explains the central bank.
The initial detonation dates back to the budget announcement. By presenting tax reductions equivalent to 1.5 % of the gross domestic product, without explaining how to finance this gift, the government caused a start to financial panic. British bonds at ten years increased from 3.1 % to 4.6 % in ten days, a very unusual movement on this kind of market. “Fundamental problems accumulate in the United Kingdom, says Antoine Bouvet, interest rate strategist of the Dutch bank ing. There is the budget deficit, but also the deficit of the current account, and the inflation which is torched [ at 10 %]. Everything is pushing for a rise in rates. “
” Too short intervention “
This economic problem then contaminated the financial markets, destabilizing in particular the pension funds. For the past twenty years, they have bought financial products (“swaps” interest rate) which report when interest rates have dropped. As long as inflation was low and the rates remained historically low, everything was fine. The sudden reversal of the market with the great return of inflation for a year has caused losses, which forces them to quickly find liquidity.
Pension funds are forced to sell their assets in an emergency, which amplifies financial panic. In this context, the pound sterling reached, on September 26, the lowest level of its multi -year -old history against the dollar, at 1.035. Two days later, the BOE tried to stop the snowball effect. She announced that she was recovering to buy British obligations for a short period, until October 14. Pension funds could thus find a buyer as a last resort, if necessary.
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