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UK Chaos Economics: Fretting over “Financial Stability” & “Contagion” after Gilts Plunged, Bank of England Buys Bonds

Wolf Street | Sept. 28, 2022

Over the past few days, the pound plunged, including with a flash-crash on Monday that briefly took it to record lows against the US dollar. Prices of long-dated bonds went into a death spiral, with the 10-year yield spiking by 130 basis points in four trading days to 4.63% early today, and by 275 basis points in seven weeks ago (up from 1.88% in early August).

The bond market reaction represents a colossal and sudden degree of “tightening” of the financial conditions, before the Bank of England’s QT had even started. QT is designed to bring up long-term yields, but they already exploded due to chaos.

It was the market’s backlash against the new government’s reckless plan to cut taxes for the rich and for corporations, funded by new debt, while piling on spending to subsidize energy costs, also funded by new debt, thereby requiring the issuance of large amounts of new debt, even as inflation has already reached to 10%.

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1 Comment on UK Chaos Economics: Fretting over “Financial Stability” & “Contagion” after Gilts Plunged, Bank of England Buys Bonds

  1. I saw it reported that many large gilt holders, including systemically important pension funds, were facing ruinous margin calls due to exploding yields, which is why the BOE had to step in and shore up the bid.

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