Is The U.K. The Canary In The Coalmine?

  • The new UK government proposed an ambitious program of tax cuts and energy price caps, but they took the financial markets by surprise and they balked.
  • The ensuing sterling and gilt crisis forced the BoE to intervene in the bond market in order to keep UK pension funds adrift, and a snowballing selloff was set in motion.
  • While we thought the UK pension systems was one of the more solid ones in the world, it turned out there were massive derivatives positions underneath.
  • These positions couldn’t handle a 150bp rise in gilt yields, and the crisis isn’t resolved, with the BoE and UK government facing some very awkward choices.
  • Given the relative strength of UK finances and pension funds, we wonder where the next domino to fall may be, now that the tide of world liquidity is receding rapidly.
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Is The U.K. The Canary In The Coalmine? | Seeking Alpha