The stresses building in the U.K. bond market are a sign of growing problems more broadly in financial markets, according to a leading strategist.
Nomura’s Charlie McElligott says as leading policymakers head to Washington for the International Monetary Fund/World Bank meetings, the rest of the world is dealing with a dollar
surge that is exporting inflation to everyone else, forcing their own policy tightening into recession feedback loop.
He noted the stresses in U.K. fixed income, as the Bank of England expands its bond buying into inflation-linked securities — where yields had the hit highest levels since Oct. 2008 — at the same time that data shows unemployment falling to the lowest levels since 1974.
The price of the 30-year inflation-adjusted gilt plummeted 17% in value on Monday, according to FactSet data.
“So here we are, with the BoE mixing ‘uppers’ with their ‘downers,’ drinking Red Bull Vodkas as they simultaneously hit the gas and brakes in chaotic fashion,” he said.
McElligott said the core issue is that penson funds globally have been shifting assets to alternative buckets, such as private equity and venture capital.
“Which means that they have little choice but to sell liquid fixed income and equities, as well as redeeming from hedge fund investments, who then too need to sell assets in order to raise cash in a world where your ‘risk free’ collateral and underlying leveraged risk-exposures are moving multiple standard deviations each day.”