Feature – Volatility


It may now seem like a bad dream. Yet among all the noise of the market chaos that has followed September’s mini budget, commentators caught up in the myth of pension schemes going bust and sterling bombing, missed one thing: the crisis was fundamentally, and importantly, a bond story. During the heady days that followed Kwasi Kwarteng announc- ing his economic plan, gilts went off the scale into truly disas- trous territory. The price of government debt slumped, causing yields to climb to their highest since the financial crash in 2008, as investors demanded higher returns. Indeed, yields on 30-year UK sovereign bonds hit 5.17% on 28 September in the aftermath of Kwarteng’s announcements. The day he was sacked saw them move to 4.22%. However,


24 | portfolio institutional | November 2022 | Issue 118


that’s still some way above the level they were at the day before the mini budget, which took place on 23 September, when they stood at 3.59%. They then settled at 3.64% with the arrival of Rishi Sunak into Number 10. After the much discussed Bank of England intervention into the bond market, ostensibly to protect over leveraged pensions from rising gilt yields (see pages 18-23), after what was a dismally assembled fiscal policy in the mini budget, it was evi- dently too much of a toxic brew for sovereign bonds. Yet Alexis Stenfors, an economist, offers a different view. “The episode involving Liz Truss and the mini-budget, and then the one featuring the Bank of England gilt intervention, showed that the long-end yield had become extremely sensitive follow-


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