Bond market volatility continued on Wednesday morning after the Bank of England stepped in to take action to stabilize spiking U.K. gilt yields.
What Happened? U.K. government bonds were on track for their largest monthly rise since 1957, but the Bank of England announced it will suspend its planned bond selling next week and begin buying long-dated bonds. The bond market volatility ramped up starting last Friday when new U.K. Prime Minister Liz Truss announced a bold stimulus program that includes tax cuts and investment incentives.
The yield on 10-Year U.S. Treasury bonds also briefly topped 4% on Wednesday ahead of the Bank of England's announcement, before dropping back down to 3.83% following the U.S. market open.
Why It's Important: Investors have been spooked by new U.K. tax cuts and investment measures that critics say will disproportionately benefit the wealthy and contribute further to the U.K.'s debt problem as interest rates rise rapidly. The British pound also traded lower by 1% against the dollar on Wednesday, after falling to record lows against the dollar earlier in the week. The iShares MSCI United Kingdom ETF EWU traded higher by 0.2%.
Stock and bond prices have been tumbling, and yields have been spiking over concerns about how quickly and how high central banks will need to raise interest rates to bring inflation under control. Year-to-date, the SPDR S&P 500 ETF Trust SPY is down 23.6%, while the iShares 20 Plus Year Treasury Bond ETF TLT is down 28.7%.
Tom Essaye, founder of Sevens Report Research, said Tuesday that U.S. investors can't simply ignore the volatility in the U.K.
"Going forward, this currency and bond market volatility absolutely adds downward pressure on stocks and increases the chances we see a funding crisis of some sort that could send stocks sharply lower," Essaye said.
The U.S. Federal Reserve has issued three consecutive 0.75% interest rate hikes, but the latest inflation data suggests more hikes could be coming. The bond market is currently pricing in a 100% chance the Fed will raise rates by at least 0.5% at its next meeting in November and a 49.2% chance the Fed will opt for a fourth consecutive 0.75% rate hike, according to CME Group.
Benzinga's Take: Weakness in the stock and bond market in 2022 has been all about one topic: inflation. Given the recent selling pressure, the upcoming release of the Personal Consumption Expenditures (PCE) Price Index data on Friday could be a major bullish or bearish catalyst for the S&P 500.
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