HomeBusinessALEX BRUMMER: Bond turmoil piles the pressure on central banks

ALEX BRUMMER: Bond turmoil piles the pressure on central banks


The danger point in any real world emergency is when it transmogrifies into a financial crisis.

At the start of Covid two years ago, the US Treasury market was in chaos and the Federal Reserve and other central banks led an enormous rescue operation, which included cutting interest rates to the bone and pumping trillions of dollars of cash into the market.

A similar exercise took place after the Lehman insolvency triggered the great financial crisis in 2008.

Damage report: The Bank of England notes the fallout from Russia’s monstrous attack on Ukraine has been high volatility and tighter financial conditions in bond markets

Could this be happening again? So far, as the Bank of England notes in its financial policy report, fallout from Russia’s monstrous attack on Ukraine has been high volatility and tighter financial conditions in bond markets.

The Bank does highlight concerns of counter-party risk. There has already been a default by Russian bank VTB on the London Clearing House and significant stress in commodities with nickel trading halted for several days.

Worryingly, there has been a sharp sell-off in the $23.5 trillion (£17.8 trillion) US Treasury market, raising liquidity fears. 

As yields on government bonds have spiked, as a result of the Fed tightening and geo-political uncertainty, prices have dropped sharply. The key US bond index has fallen 6 per cent, which makes it the worst start to the year in history.

Turbulence has scared away key players in the market, including insurers, overseas central banks and pension funds.

All of these investors have good reason not to put investors’ and taxpayers’ money at unnecessary risk.

In recent days, there also has been a cash flight from US bonds into equities, which is why both the S&P 500 and FTSE 100 have recovered most of the losses seen in the earlier stages of Europe’s new war.

At the start of the pandemic, the Fed piled into the money markets and bought up $1.6 trillion of US bonds. 

It put together swap lines with other central banks, an extra source of liquidity, and slashed its key Fed funds rate to a zero to 0.25 per cent range.

The Fed is in a very different place now. In spite of the uncertainty unleashed by the war in Ukraine, it is coming down hard on inflation, withdrawing from bond buying and signalling that it could, over time, lift interest rates to 3 per cent to combat surging inflation.

One doesn’t have to be a monetarist to think the blizzard of money showered on financial markets, and directly to the American households in the shape of cheques from the US Treasury, is contributing to an inflationary bubble caused by global energy bottlenecks. 

Soaring bond yields may simply be a reaction to Fed tightening. But there is the worry that geopolitical concerns, from Ukraine to China, could trigger something much worse. 

This time around central banks will be much less willing to provide shedloads of cash.

Mud Hut

The arrival of media heavyweight Charles Allen as chairman of The Hut Group (THG) is failing to steady the ship. The online beauty and protein firm’s shares slipped 1.5 per cent in latest trading and have tumbled 88 per cent from their peak.

Matt Moulding, who occupies the dual role of executive chairman and chief executive, is doing his best to resolve governance misgivings. 

It might have been better had the highly paid Who’s Who of advisers and bankers to the listing dealt with some of the shortcomings – such as the role of founder Moulding as the company’s landlord – before the event.

To its credit, THG has sought to provide the market with some clearer key performance indicators. But the allocation of profits among divisions, a factor which may have contributed to the vertiginous share price decline, is still unfinished work. 

We are assured that THG’s statutory accounts ‘have been thoroughly audited’. That will be scant comfort to investors sitting on large losses, and will be making it harder for London to attract the tech floats it craves.

Simon says

Next chief executive Simon Wolfson is best known for outperforming analysts’ forecasts. 

It is a jolt when the fashion to homeware group, which has navigated online space so well, cautions that Russia’s war on Ukraine has added to a ‘cocktail of uncertainties’, including inflation and UK taxes. 

The loss of fashion savvy-Russians and disruption in Ukraine’s warzones will shave up to £18million off future profits. 

Marking down the shares, after a robust 10 per cent rise in profits to £823million, is a touch churlish.

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