By William Watts
Global financial market stresses are piling up, but the commotion that forced the Bank of England to make an extraordinary intervention in the U.K. bond market Wednesday isn’t likely to be a game-changer for U.S. stock-market investors on the lookout for a market breakdown.
A working notion among investors and traders has been that the Federal Reserve will continue to aggressively raise interest rates “until something breaks,” forcing policy makers to ease up and potentially allowing a battered stock market to put in a bottom.
While a chaotic day in U.K. markets adds to a list of global financial worries, it isn’t likely to give Fed policy makers reason to slow down, much less pause, investors and analysts said.
“I don’t think you can read into the Bank of England actions in the gilt market and draw conclusions about the Federal Reserve and the U.S. bond market,” said Michael Antonelli, market strategist at Baird, in a phone interview.
‘Whatever scale is necessary’
In a stunning reversal, the Bank of England on Wednesday announced it would buy U.K. government bonds, or gilts, with long maturities at “whatever scale is necessary” to arrest a surge in yields that followed the U.K. government’s announcement last week of a deficit-boosting raft of tax cuts and energy aid.
The BOE had been planning to sell bonds it had accumulated on its balance sheet as part of its quantitative easing program. Soaring bond yields had been accompanied by a sharp selloff in the British pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.0163% , which on Monday traded at an all-time low versus the U.S. dollar. The moves were alarming, as rising yields typically support developed market currencies, stirring fears of a financial crisis that could have collateral damage on global markets and the economy.
The BOE’s about-face, meanwhile, meant the central bank had to effectively loosen monetary policy, putting its responsibility for maintaining financial stability at odds with its inflation-fighting mandate.
The moves translated into a pullback for U.S. Treasury yields, which have soared in recent weeks, while the rates market showed traders scaled back expectations somewhat around how aggressive the Fed will be in raising rates. Yields and debt prices move opposite each other. Treasury yields pulled back sharply Wednesday, in a move analysts attributed to traders taking profits on short bets.
A run-up in short-term rates in anticipation of aggressive Fed tightening have contributed to a selloff in equities. Higher yields make Treasurys more attractive to investors relative to equities and other assets perceived as risky.
U.S. stocks bounced sharply as yields fell Wednesday. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.55% closed with a gain of nearly 550 points, or 1.9%, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.75% rose 2%. The Dow and S&P 500 ended Tuesday at their lowest since November 2020 as they extended a losing streak to six straight sessions.