The Gilt market operations are a specific measure to tackle a specific problem: prevent disorderly fallout from collateral calls on pension fund LDI strategies. The FPC action was not taken to prevent a rise in Gilt yields, but to stem the speed of the rise. As such, it may be wrong to extrapolate the BoE’s actions yesterday as a pivot moment for Central Banks globally and a top in yields.
The Truss government still shows little sign of backtracking on its tax cuts. A tighter fiscal policy is needed: however, more industry bodies are calling for government support. The Society of Motor Manufacturers and Traders called today for “long-term action” from the government on companies’ costs. A culture, expectation of bailouts now pervades.
The spike in Gilt yields will be a warning to the BoJ, and other major Central Banks. A removal of the yield cap on 10-year JGBs could trigger an even larger bout of volatility in bonds markets.
Equity markets remain vulnerable to more Chinese property sector defaults. Another default this week sent property developer shares and bonds sliding. Downgrades in the leveraged loan market risk triggering credit rating limits on CLOs.
