Britain’s market rout stokes contagion fears around the globe

NEW YORK/LONDON, Sept 28 (Reuters) – The scale and speed of the sell-off in British assets has jolted world markets, raising concern about contagion as chaos in a major developed economy adds to unease already generated by sharp interest rate rises from the United States and elsewhere.

Following Friday’s UK mini-budget, which flagged 45 billion pounds’ ($48 billion) worth of unfunded tax cuts, sterling tumbled to record lows while British bond prices slid. Signs of dislocation were apparent on Wednesday before the Bank of England (BoE) stepped in to calm markets.

Markets had already been unnerved by an energy shock that has fuelled inflation and a strong dollar that is creating headwinds globally and which prompted a rare Bank of Japan intervention in currency markets just last week.

“It is like having a sand castle where bits and pieces start falling off all together,” Olivier Marciot, head of investments for multi assets and wealth management at Unigestion, said, referring to Britain contributing to global stress. “I think the UK is one of those pieces … It is just adding to the pain, adding to the stress.”

Concern about the UK’s new economic policy has added to the already heightened volatility, with a rout in gilts spilling over into even safe-haven U.S. Treasuries and top-rated German bonds.

Clearly, global angst is rising about the spillover from Britain. Atlanta Fed President Raphael Bostic on Monday warned events in the United Kingdom could lead to greater economic stress in Europe and the United States, while the International Monetary Fund on Tuesday took aim at new British financial plans. U.S. Treasury Secretary Janet Yellen said on Tuesday the United States was monitoring developments in Britain, the Financial Times reported.

“There will be impacts, there’s correlations … some market volatility, and then how it weighs in the global growth picture,” said Paul Malloy, head of municipals at Vanguard. “The U.S. is a broadly insulated economy … we’re a lot more insulated from a lot of global pressures, but with that said, we’re not completely immune from what happens in Europe, China and the UK.”

PIMCO’s chief investment officer, Dan Ivascyn, said that although he believed developments in the UK did not represent significant systemic risks, they did add to volatility in already volatile markets.

As Britain’s gilt yields soared 100 basis points over the course of two days to multi-year highs, U.S. 10-year Treasury yields and German Bunds were dragged higher too.

The ICE BofA Move Index (.MOVE), a measure of volatility in the U.S. fixed income market, has also jumped to its highest level since March 2020.

The wild swings in the pound have ricocheted across currency markets, where volatility was already climbing. According to the widely watched Deutsche Bank Currency Volatility Index , volatility across currencies on Wednesday hit its highest level since the March 2020 COVID-19- induced market meltdown, jumping more than 20% from levels last week.

The BoE’s announcement on Wednesday that it would buy as many long-dated government bonds as needed between now…