The Bank of England decided to step up its intervention in the bond market, which is considered to be the second expansion within two days. The bank warned about “material risk” to the UK’s financial stability from dysfunction in part of the market.
Since the death of the queen, the UK market faced turmoil following the U-turn that was announced by the new prime minister regarding tax-cutting and spending policies, which was unwelcoming by economists as it will not help ease inflation, in addition, it will require a large amount of borrowing, while interest rates are rising.
Earlier today, the IMF said that government policies were complicating the central bank’s fight against inflation.
The sharp rise in bond yields, mainly for the long maturities, has pushed pension funds to sell bonds to raise cash for collateral. This has forced the Bank of England to intervene as well by offering to buy government bonds and pause its plans to sell off its debt holding back to the market.
Following the intervention, bond yields eased for a very short period as everyone started to wonder what will happen when the operation ends by the end of Friday.
Such comments turned the global markets upside down. The US equities were near the high of the day before they tumbled back to the lows losing over 1% within a few minutes. In the currency market, the pound tumbled again to 1.0960’s at the NYSE closing bell, while the Dollar Index reclaimed the 113.0 resistance area.
The upcoming days are crucial as such a scenario may spread somewhere else, while strong USD would probably trigger another intervention here and there, but we are watching for BoJ for now.