It was a crazy week in currency and fixed income markets following a surprise budget announcement from the United Kingdom.
In short, they announced tax cuts amid surging inflation. The market essentially treated them like an emerging market country. Their bond yields surged, and their currency collapsed.
The currency would drop 8% in less than two days and hit an all‐time low versus the U.S. dollar. The UK 2‐year government bond yields jumped 120 basis points in three days while their 30‐year government bond yields jumped 130 basis points. This caused long government bond prices to be down 50‐60% from issue price.
On Wednesday the Bank of England intervened in the bond market and committed to buy unlimited amounts of long bonds to stabilize the market. It would later be revealed that large pension funds made the call to the central bank as they would be imminently insolvent unless something was done.
Amid market turmoil, the central bank started a form of yield curve control under the guise of ensuring stable markets. The market is still pricing significant hikes from the Bank of England to help stem anticipated inflation. U.S. bond markets moved directionally with UK yields and the 10‐year Treasury pierced 4.0% this week.