UK government bonds have seen the largest selloff since October’s “mini budget” crisis, with 2-year gilts hitting a peak of 4.9% yesterday (highest since 2008).
THIS IS NOT A REPEAT OF OCTOBER MOVES
A big question is if this is a repeat to what we saw in October, which caused a Pension plan crisis, Bank of England (BoE) intervention and ultimately Liz Truss’ resignation as PM.
We do not think this is a repeat of that episode:
– Daily moves are smaller in magnitude.
– Daily moves are affecting, mostly, short dated paper (whereas September/October moves were concentrated in long dated gilts),which means that UK Pension plans are much more insulated.
– Last Autumn, there was a sudden and rapid increase in yields, leading to significant disruptions within the broader credit markets. In stark contrast, corporate and financial credit spreads have narrowed in tandem with global markets, as the interest rate cycle reassessment is not being driven by a breakdown in policymaking, fear, and uncertainty.
Ultimately, October moves were all about fiscal stability of UK Finances. This time round it is all about interest rates and inflation outlook (the move on Tuesday, for instance, was due to announcement that wages had risen at the fastest pace ever outside of COVID times. This prompted markets to raise BoE rate expectations).
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