Less than two weeks ago I reported on how the UK was in financial trouble. In reality, it’s the whole financial system that is on the verge of collapsing, with the UK providing the initial tremors, signalling an imminent earthquake is on the horizon.
It started off with the Bank of England (BoE) making an extraordinary intervention due to pension funds being on the verge of collapse. Due to interest rates effectively being negative for the past decade, pension funds had been seeking higher returns in riskier products. All fine when interest rates stay low or get lower but if they suddenly rise, like they have done this year, you’re in trouble.
So the BoE stepped in and said it would purchase UK government bonds to restore orderly market conditions. This was just after it had announced it was selling UK government bonds, so really signalling confidence to the market! It would offer to buy up to £5billion per day (£65 billion in total) until 14 October.
In my article less than a few weeks ago, I said:
How long will this intervention last this time. The 2008 intervention lasted about 10 years. The 2020 intervention lasted a couple of years. This crisis? A few months, weeks?
Turns out weeks was the right answer. Surprisingly, there wasn’t much interest in the BoE’s offer and they bought nowhere near the amounts the were offering. Initially, UK bond prices dropped on the BoE’s intervention but that didn’t last long and they quickly reversed direction. So much so that yesterday the bank announced that it was doubling the amount it was offering to buy each day and today it extended its intervention to purchase index-linked gilts. Index-linked gilts are another product typically held by pension funds which are the source of all the panic. It warned of “a material risk to UK financial stability”.