Britain’s market rout adds to rising interest-rate unease around the globe

The scale and speed of the sell-off in British assets has jolted world markets, raising concern about contagion as chaos in a major developed economy adds to unease already generated by sharp interest-rate rises from the United States and elsewhere. Following Britain’s Friday mini-budget, which flagged £45-billion ($67-billion) worth of unfunded tax cuts, sterling tumbled to record lows while British bond prices slid. Signs of dislocation were apparent on Wednesday before the Bank of England (BoE) stepped in to calm markets.

Markets had already been unnerved by an energy shock that has fuelled inflation and a strong dollar that is creating headwinds globally and which prompted a rare Bank of Japan intervention in currency markets just last week.

“It is like having a sand castle where bits and pieces start falling off all together,” Olivier Marciot, head of investments for multi assets and wealth management at Unigestion, said, referring to Britain contributing to global stress.

Concern about Britain’s new economic policy has added to the already heightened volatility, with a rout in gilts spilling over into even safe-haven U.S. Treasuries and top-rated German bonds.

Clearly, global angst is rising about the spillover from Britain. AtlantaFedpresidentRaphaelBosticonMondaywarned events in Britain could lead to greater economic stress in Europe and the U.S., while the International Monetary Fund on Tuesday took aim at new British financial plans. U.S. Treasury secretary Janet Yellen said on Tuesday the U.S. was monitoring developments in Britain, the Financial Times reported.

As Britain’s gilt yields soared 100 basis points over the course of two days to multiyear highs, U.S. 10-year Treasury yields and German Bunds were dragged higher, too.

The ICE BofA Move Index, a measure of volatility in the U.S. fixed-income market, has also jumped to its highest level since March, 2020.

The wild swings in the pound have ricocheted across currency markets, where volatility was already climbing. According to the widely watched Deutsche Bank currency volatility index, volatility across currencies on Wednesday hit its highest level since the March, 2020, COVID-19-induced market meltdown, jumping more than 20 per cent from levels last week.

The BoE’s announcement on Wednesday that it would buy as many long-dated government bonds as needed between now and Oct. 14 to stabilize markets brought some calm.

But the risk of contagion remains given the backdrop of global uncertainty and the higher global interest rates.

“Markets are selling off, central banks are very hawkish … and that sense of confusion means moves have a tendency to self-feed,” said Charles Diebel, head of fixed income strategy at Mediolanum Asset Management.