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Bonds Rally Out of “Free Fall” On BOE Intervention

Bond yields spiked over the past week as global financial assets sold off. Stock markets here re-tested the June 2022 lows and the 10 Year Treasury jumped from 3.50% (at the time of the Fed meeting) up to 4.01% yesterday. A 4.0% 10 Year Treasury was last seen in mid-2008. The fear trade was in full effect as markets are getting the message that the “Fed Put” is off the table – the central bank will allow unemployment, market volatility, and higher unemployment in order to control rising prices.

The announcement of large tax cuts in Britain created market turmoil as the already weakened British pound plummeted in value, rating agencies issued harsh downgrades and Gilt bond yields spiked. The Bank of England surprisingly intervened strongly, buying up as much government debt as necessary to restore stability. The BOE statement: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.” Bond markets worldwide rallied as one of the “Big 7” central banks, who often discuss policy covertly or overtly during crises, stepped up in a crisis. Maybe this sets a new higher standard for monetary or fiscal intervention (“In case of financial meltdown, please break glass, otherwise you’re on your own”). The 10 Year Treasury dropped from 4.01% to 3.69% today, the biggest drop since 2020. Interestingly, the 10 Year British Gilt bond yield spiked to 4.5% before dropping to 4.05% today, which is very close to where the US 10 Year started the day. This week’s big data release is Friday’s PCE. The monthly core rate will be very closely watched, and its elements parsed. Stay tuned…

By David R. Pascale, Jr. , Senior Vice President at George Smith Partners