Chart of the Week
The UK government’s newly announced mini-budget, consisting mainly of unfunded tax cuts, received a frosty reception from the Bank of England and the IMF, and a positively glacial one from the markets. In just three trading sessions, sterling fell by 6% against the US dollar and the 10-year gilt yield jumped from 3.50% to 4.50%.
Such shifts are the sign of a dysfunctional market. On Wednesday 28 September, in an extraordinary move, the Bank of England announced that it was stepping in to buy up to £5 billion of UK gilts per day for 13 days. The 10-year yield, which had been close to 4.60% at the start of Wednesday’s trading, ended the session at 4.0%.
The volatility in UK yields has sent shockwaves through other markets and this dramatic episode crowns several months of bond volatility. The chart below shows the 6-month volatility of 10-year bond futures for the US, Germany, and the UK.
While volatility in the US remains below the peak reached during the 2008–09-global financial crisis, in Germany it has exceeded highs reached during the eurozone crisis. Such volatility in benchmark bonds, which are considered the most liquid, is a sign of jittery investors and declining market liquidity. Until uncertainties subside over the future path of central bank policy rates, high volatility is likely to persist.
The opinion expressed above is dated September 30th, 2022 and is subject to change.
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