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Life comes at you fast. From this morning’s Bank of England Financial Policy Committee report:
US equities and the value of the US dollar had declined in Q1 as some investors reduced US dollar asset positioning. And following the US announcement on trade tariffs on 2 April, the prices of global equities, risky corporate credit, and commodities fell sharply. Market interest rates also fell and yield curves steepened. Market volatility rose significantly and the US dollar depreciated. Market functioning, in the light of exceptionally high volumes, has remained orderly. Notwithstanding these falls in asset prices, the risk of further sharp corrections remains high.
That landed in our inbox at 10:30am. And here’s the yield on UK 30-year gilts at shortly before pixel time:
30 yrs are obviously particularly important and interesting because the UK issues a lot of them, in part because of their popularity among insurers and pensions funds using Liability-Driven Investment strategies. You can read more about that from Toby here.
They’re also, infamously, the asset class that got most blown up the in the mini-Budget aftermath. So how much trouble are they in?
Well, they’re moving more than their peers in other markets, which is never a good start. Plus. today has seen the biggest move since the aftermath of Liz Truss’s mini-Budget in 2022 (more on that here). Which, tbf remains a pretty steep wall to climb:
What’s happening? Well, the obvious answer is that US Treasuries are up, so gilts basically have to move too. Again, read your Toby.
There’s also a possibility that the UK will have to cobble together some kind of fiscal response to Donald Trump’s tariff shock, which would involve more borrowing and more price pressure on gilts.
But that doesn’t explain why 30 yrs are specifically getting hit so hard. As TD Securities’ Pooja Kumra writes of this “glaring move”:
On every metric, 30y Gilts are cheap: 30y Gilts vs. UST/Bunds, 30y UK ASWs or 5s30s curve, the move has been striking. Key risk for trade remains illiquidity due to which we keep a wider stop.
She notes:
— Sell-off in long-end seems similar to move seen March 2020. Trigger was global funds liquidating all non-USD holdings as a move to rush to cash. Tracking our fund flows, long-end Gilts have been the key beneficiary of these flows. EPFR flows are still muted in Bunds and so there is less liquidation move.
— Growing presence of leveraged players in Gilt cash and repo market. A key risk flagged by the BoE members.
Once again, all simply roads may lead to Threadneedle Street. Markets are now pricing in far more Bank of England rate cuts, but this type of action might force the Monetary Policy Committee could move more quickly, Kumra suggests:
Markets should not underestimate a possible easing in the form of regulations or verbal easing or even temp QT freeze on this move.
We’ve said it before: it’s Andrew Bailey’s world, we just live in it.
Further reading:
— Where the Bank of England’s QE programme went wrong
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