Bank of England Goes Back to QE, as Bond Market Breaks Down

Sept. 28, 2022 (EIRNS)—Coming amid furious rate-hiking by the Federal Reserve, the British Truss government’s announced “borrow a trillion” budget of Sept. 22 has blown a hole in the global bond markets bigger than the holes they probably blew in the Nord Stream pipelines.

There is the sovereign side: British 2-year so-called “gilts” suddenly have an interest rate above 5%, having recently been 1%. But much more international in scope is the corporate bond market’s explosion upward in rates, faster than ever seen before according to various pundits like Bloomberg News. Some details on this below. And the sudden moves in currencies: Dollar spikes; other major currencies plunge led by sterling; developing nations’ central banks forced into big “preemptive” rate hikes which are ruinous to their economies.

Here are some current average interest rates on corporate bonds:

OECD average of investment-grade bonds as a whole: 5.75%;

Average of high-yield or “junk” bonds (now a majority): 9%;

Average of BBB-rated bonds (just above junk in investment-grade): 7.25-7.5%;

JPMorgan Chase index of “Emerging Market” (sovereign) bonds: 8.55%

Index of no-recourse capital-raising notes issued by Canadian banks: 6.75-7.25%

And to add, the U.S. 30-year mortgage rate: 7.1% (was 3% in May).

Only six months ago was the end of zero or super-low interest rates on nearly all kinds of borrowing for 11 years straight.

When interest rates spike in such unprecedented ways, all funds which hold bonds—pension, mutual, money-market, bank, etc.—have the value of their holdings suddenly fall and face margin calls for more collateral for their current investment activities. All operations speculating in currencies get margin calls. This was already the case since the spring for commodity producing and trading companies worldwide due to inflation, war and sanctions.

Liquidity and insolvency threats everywhere.

Governor of the Bank of England Andrew Bailey stated on Sept. 26, according to a release today:

“This repricing has become more significant in the past day—and it is particularly affecting long-dated U.K. government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability.... On 28 September, the Bank of England’s Financial Policy Committee noted the risks to U.K. financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.”

He further stated: “To achieve this, the Bank will carry out temporary purchases of long-dated U.K. government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome.”

Temporary? Try to end them, and see what happens.