Political dysfunction. Government bond yields spiking. A market so thoroughly rattled it required the central bank to intervene.Some observers are worried that it might, after Treasury yields midweek surged to fresh multi-year highs amid further evidence of a sturdy economy that may encourage the Federal Reserve to raise interest rates further.
“I struggle to see how the recent yield moves don’t increase the risk of an accident somewhere in the financial system given the relatively abrupt end over recent quarters of a near decade and a half where the authorities did everything they could to control yields… risky times,” said Jim Reid, strategist at Deutsche Bank.
Bond investors, seeing the need for more debt to fund the tax cuts, and the likelihood that any resulting consumer spending boost might force the central bank to raise interest rates further, started selling, forcing yields sharply higher. There are similarities between the U.K’s 2022 scenario and the U.S. now. Political fracture is an obvious one. Liz Truss was the fourth U.K. Prime Minister in six years as the Conservative Party tore itself apart over Brexit. The removal of McCarthy comes ahead of what is expected to be a very divisive U.S. 2024 presidential election.
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