via creditbubblebulletin:
It would have been a nonevent; inconsequential. Confirming New Cycle Dynamics, the Truss government’s “mini budget” has unleashed absolute mayhem. Pension funds blowing up. Emergency central bank rescue operations. Global market instability. UK’s Treasury Secretary sacrificed after a mere 38 days, while an entire government hangs in the balance.
Friday evening Financial Times headlines: “Gilts in Fresh Slide as Investors Say Truss U-turn Did Not Go Far Enough.” “Can Liz Truss Survive as UK Prime Minister?”; “Austerity Beckons as Truss Seeks to Restore Britain’s Reputation with Investors.” And “UK Debacle Shows Central Bank ‘Tough Love’ is Here to Stay.”
The world has changed right before our eyes. It has been one of my favored rhetorical questions for the past couple decades: Is “money” (monetary inflation) the solution or the problem? The answer is obvious – has been for some time, and I’ll assume central bankers have accepted the harsh reality.
Years of unprecedented monetary inflation created false realities. The perception of endless cheap (free) “money” distorted how our market, economic, financial, political and social systems function. The long-overdue adjustment period has commenced, and there’s every reason to expect it to be especially brutal. So quickly, so many things are different. There were this week more tremors and that nagging feeling the ground was about to give way.
I feel for Liz Truss. She could very well be the shortest-serving Prime Minister in UK history. Central bankers and bond markets have merrily accommodated many a crazy budget. Now they’re running scared, leaving stunned politicians to try to figure out what can work in today’s new reality.
In a microcosm of unfolding global phenomena, the UK faces dual fiscal and monetary policy crises of confidence. And to this point in the UK, uncompromising markets want nothing to do with additional fiscal spending and monetary stimulus.
October 12 – Reuters (Dhara Ranasinghe, Harry Robertson, Tommy Wilkes): “Bank of England Governor Andrew Bailey has been unequivocal: the central bank will end emergency support for bonds on Friday. Yet with markets showing few signs of stabilising, the BoE may have little choice but to come back with more. Britain’s government borrowing costs jumped again on Wednesday with 20- and 30-year bond yields hitting 20-year highs after Bailey told pension funds on Tuesday they had three days to fix liquidity problems before emergency BoE bond-buying ends. The central bank is caught between a rock and a hard place. On the one hand it is navigating what it has called a ‘material risk to financial stability’ with the gilt market rout exposing vulnerabilities in the pensions sector. But buying bonds doesn’t sit well with the BoE’s mandate to control surging inflation and BoE officials are anxious to avoid giving the impression that they are buying bonds to support the fiscal plans of the government.”
After a decade of becoming fully embedded in market perceptions, prices and structures, as well as within governmental planning and budgets, business strategies, economic structure and the like – how do central bankers these days signal that “whatever it takes” has run its course? Can it be done without unleashing instability virtually everywhere?
Prime Minister Truss and BOE Governor Bailey could commiserate over a cup of English breakfast tea. Truss is forced to placate the bond market, while trying to avoid the appearance of a wimpy pushover quickly caving on her government’s entire fiscal agenda. It’s messy U-turns and the short-timer look of indecision.
Bailey must prevent bond market and pension system breakdowns, while not completely opening the monetary floodgates with inflation raging and the pound fragile. The BOE’s emergency bond support was to expire Friday, though few believe that’s doable. Most remain convinced that central banks are forever subjugated to “whatever it takes” market crash protection. For the BOE, it’s messy U-turns and the unsettling look of indecision. Credibility hanging in the – it’s dangling.
UK gilt yields traded as high as 4.63% in Wednesday trading, dropping to a low of 3.89% early Friday, before ending the week up 10 bps to 4.34%. Two-year UK yields traded at a 4.40% high intraday Monday, with a Friday low of 3.46% (closed the week down 25bps to 3.87%). The pound traded at a low of 1.092 Wednesday and a high of 1.138 on Thursday, before ending the week up 0.8% to 1.118.
It was an ominous week for global bank CDS. UK’s Barclays Bank CDS jumped 11 to 147 bps, the high back to July 2013 (“taper tantrum”). Barclays CDS traded at 105 bps on September 15th. NatWest CDS increased four to 131 bps, and Lloyds rose seven to 97 bps (trading this week to the high since 2016).
Curiously, US banks were again up near the top of this week’s CDS leaderboard, with the majors all seeing CDS Friday closes at highs since March 2020. JPMorgan CDS rose eight to 112 bps, with Bank of America up nine to 121 bps. Citigroup CDS rose seven to 139 bps, Goldman 11 to 142 bps, and Morgan Stanley nine to 140 bps. Elsewhere, Deutsche Bank CDS increased four to 173 bps (trading intraday Wednesday to 189 bps); Societe Generale 13 to 110 bps (intraday Thursday to 120 bps); and troubled Credit Suisse 12 to 318 bps (intraday Thursday to 341 bps).
Thursday’s stock market volatility was noteworthy. The S&P500 traded down to 3,492 following worse-than-expected CPI data, only to post a stunning 5.5% intraday rally (closing the session up 2.6%). The S&P500 then traded up to 3,712 in early-Friday trading, before reversing 3.5% lower to end the week at 3,583 (down 1.6%).
U.S. investment-grade corporate spreads-to-Treasuries widened 11 bps this week to 1.63 percentage points, the widest level since May 2020. More support this week for the singular global Bubble thesis.
October 10 – Reuters (Davide Barbuscia): “Government bond prices around the world are moving in tandem, reducing investors’ ability to diversify their portfolios and raising concerns of being blindsided by market gyrations. Correlations between currency-adjusted returns on the government debt of countries such as the U.S., Japan, the U.K. and Germany are at their highest level in at least seven years, data from MSCI showed, as central banks around the world ramp up their fight against inflation.”
October 11 – Wall Street Journal (Matt Wirz and Caitlin Ostroff): “Fallout from the crisis in U.K. financial markets has hit a faraway corner of Wall Street: the trillion-dollar market for collateralized loan obligations. Once a niche product, CLOs are now widely held by investors around the world, including the British pensions, insurers and funds that got caught by the recent crash in U.K. currency and government-bond markets. Many of them sold CLO bonds to meet margin calls, sending prices of the securities tumbling well below their intrinsic value, analysts and fund managers said.”
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