Great article written by Matthew Graham put out this past week (Friday September 30th, 2022) discussing the impact of the UK on the rate volatility we are experiencing right now.
There was no rest for weary rate watchers after last week’s rout. This week turned out to be even more volatile.
UK in The Spotlight (Still)
UK issues are still having a big impact. Last week’s rate spike was most readily attributable to market panic over a budgetary decision in The UK. Panic remained on Monday and intensified on Tuesday.
Why should the US care? Global financial markets are interconnected in many ways. Even though something that happens in The UK will have more of an effect on UK markets, if the effect is big enough, it’s felt around the world.
The drama of the past two weeks has been more than big enough. Additionally, UK and US bond markets (the markets that determine interest rates) are more correlated than most. Here’s an updated chart showing the relative movement of each country’s 10yr sovereign debt (higher yields = higher rates):
In other words, they took a sad song and made it worse. This was a very serious episode for global financial markets and especially for the UK. Markets expected some sort of official intervention on Tuesday, when it didn’t come, rates experienced their sharpest spike.
Then on Wednesday, the Bank of England (BOE) stepped in to sooth markets with an emergency bond buying announcement. While that didn’t undo all of the damage that had been done, it at least stemmed the tide of rising rates. Here’s a different visualization of US and UK 10yr bonds, this time with separate y-axes, simply to show the correlation in movement.