Whatever one’s view of the UK government’s so called “mini-Budget”, the bond market crash last week exaggerated its significance. It is true that the Bank of England may need to raise interest rates more than it would have otherwise, although even this is highly uncertain.
But what is clear is that the current government will be fortunate to survive another two years, not 30. So how can one explain market expectations for interest rates over 30 years rising from 2.5 per cent in August to in excess of 5 per cent last week?
The proximate cause of this latest panic appears to be collateral calls on UK pension funds to cover losses on hedges of their liabilities. But rapid declines in market prices, or “flash crashes”, are occurring with increasing frequency. Each post mortem reveals a different strategy, or market participant, being forced to sell. But there is a deeper cause.