When he was Prime Minister (2019-2022), Conservative Boris Johnson gave Liz Truss a nickname: “The human grenade. » Now that she has replaced him at the head of the British government, the new Prime Minister seems to justify this term. Since the presentation of its budget on 23 september, which announced the biggest tax cut since 1972, the British financial markets seem to have been hit by an explosion that never ceases to do damage.
On Tuesday October 11, the Bank of England (Bank of England, BoE) announced an extension of its emergency intervention, two weeks after having started it. His concern concerns the bond market, where volatility and tensions remain very strong, each time affecting darker corners of financial products. “The dysfunction of this market, and the risk of a sell-off dynamic, pose a serious risk to UK financial stability”explains the central bank.
The initial explosion dates back to the announcement of the budget. By presenting tax reductions equivalent to 1.5% of gross domestic product, without explaining how to finance this gift, the government has caused the beginnings of financial panic. UK 10-year bonds rose from 3.1% to 4.6% in ten days, a highly unusual move in such markets. “The fundamental problems are piling up in the UKsays Antoine Bouvet, interest rate strategist at Dutch bank ING. There is the budget deficit, but also the current account deficit, and soaring inflation [à 10 %]. Everything is pushing for a rise in rates. »
“Intervention too short”
This economic problem then contaminated the financial markets, destabilizing pension funds in particular. For the past twenty years, they have been buying financial products (interest rate “swaps”) that pay off when interest rates fall. As long as inflation was low and rates remained historically low, all was well. The sudden reversal of the market with the great return of inflation for a year has caused losses, which force them to find liquidities quickly.
Pension funds find themselves forced to sell their assets in a hurry, which amplifies the financial panic. In this context, the pound sterling reached, on September 26, the lowest level in its multi-centennial history against the dollar, at 1.035. Two days later, the BoE tried to stop the snowball effect. She announced that she was back to buying UK bonds for a short time, until October 14. Pension funds could thus find a buyer as a last resort, if necessary.
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