Marketmind: British bond burn

Illustration shows Pound coins plunging into water

A look at the day ahead in U.S. and global markets from Mike Dolan

U.S. Treasury markets return from their long weekend to fresh trouble in bond land – with British government debt still the epicentre of the shock amid disquiet over government policy, soaring interest rates and pension fund firesales.

The Bank of England intervened yet again on Tuesday to stem a sharp sell-off in Britain’s 2.1 trillion-pound ($2.31 trillion) government bond market by announcing the purchase of inflation-linked debt until the end of this week.

In an extraordinary statement revealing the extent of the blowout in what were seen as the ‘safer’ parts of G7 government bond markets, the BoE said: “Dysfunction in this market, and the prospect of self-reinforcing ‘firesale’ dynamics pose a material risk to UK financial stability.”

And it’s the ‘firesale’ element which unnerves the BoE and all markets fearful of systemic risks, as extensive margin calls on UK pension fund liability hedging have been triggered ever since debt yields soared following the government’s botched mini-budget late last month.

Bank of England governor Andrew Bailey speaks in Washington later on Tuesday.

Independent assessments of finance minister Kwasi Kwarteng’s ‘go for growth’ tax and spending cuts were sceptical the measures could stabilise Britain’s rising debt load as borrowing costs climb.

The Institute for Fiscal Studies said in a report on Tuesday Kwarteng needs to make 62 billion pounds of spending cuts or tax rises to stop public debt growing ever-larger as a share of the economy.

Growth is in short supply everywhere as central banks stamp on activity to snuff out decades-high inflation that’s been exaggerated by an energy shock following Russia’s invasion of Ukraine and the deepening conflict there.

The International Monetary Fund on Tuesday is expected to downgrade global growth forecasts again when it publishes its latest World Economic Outlook and Global Financial Stability Report at the annual IMF/World Bank meeting in Washington.

JPMorgan chief Jamie Dimon said on Monday the United States and world economy could tip into a recession by the middle of the next year and the S&P 500 could fall by “another easy 20%” from the current levels, with the next 20% slide likely to “be much more painful than the first”.

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And worries about China’s growth funk intensified on Tuesday. Beijing vowed to stick to its zero-COVID policy, with Shanghai and other big Chinese cities, including Shenzhen and Xian, having ramped up testing for COVID-19 as infections ticked up after a week-long holiday.

Its parallel property debt market crisis shows no sign of abating either. Moody’s on Tuesday said it withdrew the credit ratings of property developers China Evergrande and Kaisa Group because of insufficient information.

Ahead of the open, 10-year U.S. Treasury yields were again flirting with the year’s highs above 4% and global stocks were heading for new 2022 lows. European bourses and U.S. stock futures were in the red again and down almost 1%. The supercharged dollar continued to probe higher.

Key developments that should provide more direction to U.S. markets later on Tuesday:

* U.S. Sept NFIB small business index.

* International Monetary Fund publishes World Economic Outlook and Global Financial Stability Report at annual IMF/World Bank meeting in Washington.

* Bank of England Governor Andrew Bailey, BoE deputy governor Jon Cunliffe, Swiss National Bank chief Thomas Jordan, European Central Bank chief economist Philip Lane, ECB board member Fabio Panetta, ECB bank supervisor Andrea Enria speak in United States.

* Cleveland Federal Reserve President Loretta Mester, Philadelphia Fed chief Patrick Harker speak.

* U.S. Treasury auctions 3-year notes.

* NATO Defence Ministers meet in Brussels, European Union Energy ministers meet in Brussels.

(By Mike Dolan, editing by Ed Osmond, Twitter: @reutersMikeD)