Encountering "meltdown-style" sell-off, is the UK repeating the 2022 "Tulsa Crisis"?

Despite the recent months of rising bond yields in the UK, market anxiety intensified this week as concerns about inflation and the Labour Party's spending plans have triggered nerves. On Wednesday, UK bond yields reached multi-decade highs, with the UK's 10-year bond yield soaring to its highest level since 2008, and the 30-year bond yield reaching its highest level since 1998. Similar concerns about the tax and tariff policies of President-elect Trump in the US are also heating up, further exacerbating market worries. The "meltdown" of the UK market is the latest warning to the UK economy and is putting immense pressure on the struggling Labour government led by Keir Starmer. In a sense, these actions represent the culmination of all the worst-case scenarios for investors in the UK: sustained price pressures and lackluster economic growth. Additionally, like most European countries, the UK economy also faces risks from the tariffs promised by Trump - although some economists believe that the impact on the UK economy may not be as severe as in other regions. Moreover, the ever-expanding UK government debt is also putting pressure on the market. The Labour government plans to sell 297 billion in bonds in the current fiscal year, the second highest on record, putting pressure on gilts as investors worry about the outlook for the country's growing debt. Marcus Jennings, Fixed Income Strategist at Schroders Global, says, "In the UK, you will see a negative feedback loop, where higher yields mean higher borrowing, leading to greater fiscal concerns. This is unique to the UK. Investors are worried about stagflation." Stock markets and the pound are also taking a hit. The FTSE 250 index, tracking mid-cap stocks, fell 1.9%, the largest drop since August last year. The pound-dollar exchange rate is approaching 1.23, the lowest level in 13 months. In addition to causing significant losses for bondholders, the rise in yields is also causing problems for UK officials: according to the fiscal rules laid out by Chancellor Rachel Reeves, if yields remain elevated, tax increases or spending cuts may be necessary. Neil Birrell, Chief Investment Officer at Premier Miton Investors, also says, "This feels a bit like a slow-burning fire, akin to Liz Truss's pre-budget. We are touching on the market's threshold point where this doesn't work. You can't raise taxes while cutting spending and still expect economic growth." Roberto Cobo Garcia, Director of Foreign Exchange Strategy at Banco Bilbao Vizcaya Argentaria, says, "This looks like a small 'scaffolding moment' that could be amplified if investors begin to price in a more dovish stance by the Bank of England or if fiscal problems worsen. Despite the lack of clear driving factors, the pound is suffering amid rising yields. Issues in the property market, warnings from credit rating agencies, fiscal imbalances, and potential additional resistance from a potential confrontation with the US government all contribute to some position adjustments and changes in monetary policy expectations." Analysts describe these actions as a small version of the 2022 crisis. UK investors are particularly concerned that persistent price risks will make the Bank of England cautious about cutting interest rates, while rising yields could force the Labour government to increase taxes or borrow further. The bond market this week has seen a rapid snowballing decline without any apparent catalyst, highlighting how fragile market sentiment is. The fact that interest rates are rising alongside a depreciation of the pound is also unsettling for traders. Typically, higher bond yields boost the value of the currency. Mike Riddell, Portfolio Manager at Fidelity International, says, "While there are no signs of crisis yet, this could be evidence of buyers unwinding and potential capital flight." Traders suggest that the UK market is unlikely to repeat the mistakes of 2022, when Liz Truss introduced a fateful budget. Debt-driven investment strategies at the core of this turmoil must hold more cash buffers to reduce the likelihood of another liquidity crisis. The Bank of England is also developing a repo tool that would allow these funds to raise cash in case of future instability. Kathleen Brooks, Research Director at XTB, says, "The UK government needs to act now rather than procrastinate on significant, difficult decisions. Bond vigilantes have not yet tracked the market, but they are watching. If the Labour government accelerates its review of public spending, cuts expenditure in a planned manner without affecting GDP, and devises a clear plan to ensure the National Health Service (NHS) remains sustainable, they could regain market confidence. The market is praying for the UK's economic growth, however, I don't believe the market will welcome more tax increases, as both business and consumer confidence are low." These changes largely reflect shifts in positions rather than fundamentals, as the UK's higher yields have attracted many investors. According to data from the US Commodity Futures Trading Commission (CFTC) for the week ending December 31, the pound was the only currency in the G10 to have leveraged funds net long in dollars. Nevertheless, the fact that the UK market is prone to such sudden fluctuations suggests that its weaknesses may deter international investors. Though different from today, memories of the 2022 UK debt crisis remain fresh, and the UK's economic challenges are far from resolved. Michael Tukker, Strategist at Dutch International Group, says, "There are many factors driving the pound higher, including Labour's spending ambitions, stubborn inflation, rising US rates, and supply pressure. We still expect UK bond yields to fall later this year, but as long as these factors exist, a change in direction may take some time.""S, estoy de acuerdo contigo." "Yes, I agree with you."Bonjour! Comment vas-tu aujourd'hui?