• Richard Murff

Mind the Gap


Not what it used to be...

Until very recently, I’d always assumed that the whole point of being British was to not get excited. This is the same little island that handles international communism, the Luftwaffe and radioactive “Megan and Harry” fallout with an admirable “Keep Calm and Carry On.” They can, and do, get utterly pissed on warm beer and scotch, but are still home by 11:30. These are people who queue up for a bank run. Until they didn’t.


Roger Bannister’s four-minute mile notwithstanding, it isn’t a place given to great speed: It used to take six months to get to the other side of the empire; the streets, doors and hallways are too narrow to pass by in a pinch; and dinner comes so late they invented meal cover the gap. They can be philosophical about losing the empire because it happened in slow motion. Then, after losing their longest reigning monarch some 48 hours into a new government, all hell broke loose.


Like most central banks, the Bank of England was soberly tightening monetary policy by inching interest rates up against both inflation and the US Dollar’s current bout of ‘roid rage. Then, looking to make a splash, the new PM, Liz Truss, and her Chancellor of the Exchequer (like a Treasury Secretary but with more vowels) Kwai Kwarteng announced a sweepingly underfunded “mini-budget” with a sensible tax-cut and a raft of new spending that was less so.


What happened next was, words fail me, very American. As citizens of the Great Republic, we know from the last two election cycles that once someone goes rouge on logic, everyone else follows.


Seeing that the numbers didn’t really add up, investors in British bonds – called gilts – ran for every narrow exit they could find. British bond traders were recording “no bids” on gilts as liquidity drained out of the market. Prices fell through the floor, yields went through the thatched roof and the pound sank to an historic all-time low against the dollar. All of which threatened to wreck pensions holding liability-driven investment (LDI) funds as a hedge against inflation as dropping values triggered margin calls that needed to be met by selling more gilts.

British finance is supposed to be quaintly irrelevant, but there was a transatlantic spillover affecting US treasuries — the Bank of America index of credit stress was “borderline critical” – as well as the collateralized loan obligations (CLO), a niche instrument that has become another mainstream vehicle for funds.


Amid the carnage, the Bank of England stepped in to calm markets by announcing it would buy the longest-dated gilts. No market likes mixed signals. Wars, for example aren’t necessarily bad for business, but you do need to know where you stand on these things. Yet here was the B of E fighting its own policy in a panicked rescue mission of its own currency. A central bank raises rates to tighten monetary policy and cool the market. When it uses its own money to buy its own bonds, it is called “quantitative easing”, or “exactly what you do if you’re easing monetary policy”.


The B of E wasn’t keeping the program up indefinitely – in fact, the rescue was so ordered that it told everyone when they were going to stop buying gilts. And they did, which triggered yet another pin-stripe tidal wave heading toward the exit. After two extensions of the program, and the Truss government lightly – well, backtracking is the wrong word – “readdressing” its ill-advised mini-budget.


Unfortunately, for the government and its bank, events have moved beyond their immediate control, investors still aren’t convinced that Britain is a smart bet. In the words of 19th century British economist Walter Bagehot, “Every banker knows that if he has to prove he is worthy of credit, in fact his credit is gone.”