What on earth is happening in UK markets and why is the Bank of England struggling to address it?

Published

3 years ago

October 12, 2022

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This is starting to look a little… unnerving.

This morning the Bank of England tweaked its emergency intervention into the government bond (gilts) market for a second successive day.

The details are somewhat arcane: yesterday it doubled the amount it was offering to buy each day; today it said it would widen the stock of assets it is offering to buy. But what matters more is the big picture.

The government bond market is – in the UK and elsewhere – best thought of as the bedrock of the financial system.

The government borrows lots of money each year at very long durations and these bonds are bought by all sorts of investors to secure a low but (usually) reliable income over a long period of time.

Compared to other sorts of assets – such as the shares issued by companies or for that matter cryptocurrencies – government bonds are boring. Or at least, they’re supposed to be boring.

They don’t move all that much each day and the yield they offer – the interest rate implied by their prices – is typically much lower than most other asset classes.

But recently the UK bond market (we call them gilts as a matter of tradition, short for gilt-edged securities, because in their earliest embodiment they were pieces of paper with golden edges) has been anything but boring.

In the wake of the mini-budget, the yield on gilts of various different durations leapt higher – much higher. The price of the gilts fell dramatically. That, ultimately, was what the Bank of England was originally responding to a couple of weeks ago.

But to understand what a tricky position it’s in, you need to zoom out even further. For while it’s tempting to blame everything on the government and its mini-budget, it’s fairer to see this as the straw that broke the market’s back. For there are three intersecting issues at play here.

The end of the low interest rate era

The first is that we are in the midst of a seismic economic moment.

For the past decade and a bit, we (here in the UK but also in the US, Eurozone and throughout most of the world) have become used to interest rates being incredibly low.

More than low, they were effectively negative, because in the wake of the financial crisis central banks around the world pumped trillions of dollars into the financial plumbing.

They mostly did so (in this case the method really matters) by buying up vast quantities of government debt. The Bank of England became the single biggest owner of UK gilts, at one point owning roughly a third of the UK’s national debt.

It was an emergency measure designed to prevent a catastrophic rerun of the Great Depression, but the medicine has proven incredibly difficult to wean ourselves off.

A few years ago, when the US Federal Reserve thought out loud about reversing quantitative easing (QE) – as the bond-buying programme is called – it triggered such a panic in bond markets that it immediately thought twice about it.

Since then, it and other central banks like the Bank of England have been as careful as possible not to frighten these markets. They have managed to end QE and, in the case of the Fed, have begun to reverse it. This is a very, very big deal.

Think about it for a moment.

All of a sudden, the world’s biggest buyers of arguably the world’s most important asset class have become big sellers of them.

In the UK, the Bank of England was due to begin its own reversal of QE round about now.

Tensions were, even before the government’s ham-fisted fiscal statement, about as high as they get in this normally-dull corner of financial markets.

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Reliance on complex derivatives

The second issue (and this is something only a few financial analysts and residents of the bonds market fully appreciated up until a few weeks ago) is that the era of low interest rates had also driven investors into all sorts of strange strategies in an effort to make a return.

Most notably, some pension funds had begun to rely on complex derivatives to keep earning a decent return each year while complying with regulations.

These so-called Liability Driven Investment strategies were well-suited for the nine-times-out-of-ten when the gilts market was boring. But as interest rates began to rise this year – partly because inflation was rising and central banks were beginning to raise interest rates and reverse QE; partly because investors twigged that the next prime minister seemed quite keen on borrowing more – these strategies began to run into trouble.

They were feeling the strain even before Friday 23 September.

Hard to think of a worse moment for an uncosted fiscal plan

But that brings us to the third of the issues here: the mini-budget.

The government bond market was already, as we’ve established, in a sensitive position.

Markets were, as one adviser to the Truss team warned them, febrile. It is hard to think of many worse moments for a new, untried and untrusted government to introduce uncosted fiscal plans. Yet that is what Kwasi Kwarteng did in his mini-budget.

The problem wasn’t really any single specific policy, but the combination.

It wasn’t about the sums (or lack thereof) but a dramatic loss of credibility for the government.

All of a sudden, the UK, which is anyway very reliant on external funding from overseas investors, seemed to surrender the benefit of the doubt.

Traders began to pull money from the UK, pushing the pound lower and forcing interest rates in the bond market higher (after all, if people are reluctant to lend to you, you have to offer them a higher rate to persuade them).

The new Chancellor seems genuinely to have been completely taken unawares by the reaction to his plan.

Yet the reality is that it so happened (in fiscal terms at least) to be about the worst possible pitch at the worst possible time. And it pushed up interest rates on government debt dramatically.

Wave of defaults could lead to a total breakdown of system

As I say, this was far from the only thing going on in markets.

On top of all the above, there were and are question marks about whether the Bank of England is acting fast enough to clamp down on inflation.

But these questions, and many others, were effectively swamped by the catastrophic surge in interest rates following the mini-budget.

Catastrophic because the increase in rates was so sharp it threatened the very functioning of the gilts market – this bedrock of the financial system.

And for those liability-driven investors in the pensions sector, it threatened to cause a wave of defaults which could, the Bank of England feared, lead to a total breakdown of the system within days or even hours.

This fear of what it called a “run dynamic” – a kind of wholesale equivalent to what we saw with Northern Rock, where a firesale of assets causes values to spiral ever downwards – sparked it into action.

It intervened the Wednesday after the mini-budget, offering to buy £65bn worth of the longer-dated gilts most affected. The intervention, it said, was taken to prevent the financial system from coming to harm.

But the method of intervention was quite significant.

After all, wasn’t buying bonds (with printed money) precisely what the Bank had been doing for the past decade or so through its QE programme?

Well in one sense… yes. The Bank insisted this was different: that this was not about injecting cash into the economy to get it moving but to deal forensically with a specific issue gumming up the markets. Financial stability, not monetary policy.

Even so, the paradox is still hard to escape. All of a sudden the Bank has gone from promising to sell a bucket load of bonds to promising to buy them.

Market reaction

The initial market reaction was overwhelmingly encouraging: the pound rose and interest rates on government bonds fell.

It was precisely what the Bank would have wanted – and most encouragingly it seemed to be driven not by the amount of cash the Bank was putting in (actually surprisingly few investors took up its offer to buy bonds), but sentiment.

The vicious circle precipitated by the mini-budget seemed to be turning around.

But in the past few days of trading, things have unravelled again.

The pound has fallen; the yields on bonds have risen, back more or less to where they were shortly before the Bank intervened a couple of weeks ago. It is unnerving.

And this brings us back to where we started. The Bank has bolstered its intervention a couple of times but it hasn’t brought yields down all that much – indeed, quite the contrary.

As of this lunchtime Tuesday the yields on long-dated UK government bonds were even higher than they were 24 hours earlier.

Why? One obvious issue is that the Bank’s intervention is strictly time-limited. It is due to expire at the end of this week. That raises a few other questions. First, will the pension funds reliant on those liability driven investments have untangled themselves by then? No-one is entirely sure. For a sense of how worried investors are about this, just look at what happened to the pound tonight after the Bank’s governor, Andrew Bailey, insisted the emergency programme will indeed end on Friday. It plummeted off a cliff-edge, instantly losing almost two cents against the dollar.

Second, will the government have become more credible in the market’s eyes by then? Almost certainly not. Aside from anything else, it isn’t due to present its plans for dealing with the public finances until the end of this month.

Third, what does all this mean for monetary policy and the end of QE? If we are to take them at their word, after ending this scheme the Bank will shortly begin the process of selling off bonds all over again.

So, one day they’re gearing up to be a massive seller; the next a massive buyer; the next a massive seller all over again.

Little matter that the stated reasons for the bond buying/selling are different. From the market’s perspective, no one is quite sure where they stand anymore.

In this final sense, the UK has unwittingly turned itself into a kind of laboratory for the epoch we’re in right now.

Everyone was expecting bumps in the road as the era of easy monetary policy came to an end.

It seems we are currently experiencing some of those bumps. And it just so happened that, thanks in large part to its new government, the UK found itself careering towards those bumps rather than braking before hitting them.

Business

AstraZeneca exit is a frightening prospect for the City and the government

Published

4 hours ago

July 2, 2025

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AstraZeneca exit is a frightening prospect for the City and the government

It’s a threat that will send a shiver down the spine of Downing Street and shake the City of London to its core.

Even the notion that AstraZeneca (AZ) – the UK’s most valuable listed company – is thinking of upping sticks and switching its stock market listing to America is a frightening prospect on many levels.

After all, if your biggest firm departs for Wall Street, what message does it send to an already bruised London stock market that has struggled to find its way since the UK’s vote to leave the European Union?

Money latest: Cash in your pocket set to change

The timing of the report in The Times that Pascal Soriot, the pharmaceutical company’s long-standing chief executive, is considering his own Brexit for the company, will not be lost on anyone.

The Treasury is under severe strain and the Starmer government, apparently focused on compromise given its welfare reform U-turns, bruised.

Ministers have been scrambling to get the support of business back, after a budget tax raid that has added to the cost of employing people in the UK, by launching a series of strategies to demonstrate a growth-led focus.

Mr Soriot’s reported shift is the culmination of years of frustration over UK tax rates and support for business – though it could also remove a focus on his own remuneration as the highest-paid director of a UK-listed firm.

AZ has its own gripes with Labour.

In January, the company cancelled a planned £450m investment in a vaccine factory on Merseyside, accusing the government of reneging on the previous Conservative administration’s offer of financial aid.

At the same time, it has been rebuilding its presence in the United States.

That speaks to not only a home market snub but also the election of a US president intent on protecting, as he sees it, America-based companies and jobs.

Donald Trump is threatening 25% tariffs on all pharma imports.

AZ has already promised a $3.5bn (£2.6bn) investment in US manufacturing by the end of 2026.

It has also rejoined the leading US drug lobby group, bolstering its voice in Washington DC.

There are sound reasons for bolstering its US footprint; more than 40% of AZ’s revenues are made in the world’s largest economy. Greater US production would also shield it from any duties imposed by Mr Trump and any MAGA successor.

Since Brexit, complaints among UK stock market constituents have been of low valuations compared to peers (with a weak pound also leaving them vulnerable to takeovers), weaker access to capital and poor appetite for new listings.

Wise, the money transfer firm, became the latest UK name to say that it intends to move its primary listing to the US just last month.

If followed through, it would tread in the footsteps of Flutter Entertainment and the building equipment suppler CRH – just two big names to have already left.

London was snubbed for a listing by its former chip-designing resident ARM back in 2023.

An initial public offering by Shein, the controversial fast fashion firm, had offered the prospect of the biggest flotation for the UK in many years but that was blocked by the Chinese authorities.

Efforts to bolster the City’s appeal, such as through the Financial Conduct Authority’s overhaul of listing rules and the creation of pension megafunds to aid access to capital, have also been boosted in recent months by investors in US companies taking a second look at comparatively low valuations in Europe.

Market analysts have charted a cash spread away from the US as a hedge against an erratic White House.

The Times report suggested that Mr Soriot’s plans were likely to face some opposition from members of the board, in addition to the UK government.

AstraZeneca has not commented on the story. Crucially, it did not deny it.

But a government spokesperson said: “Through our forthcoming Life Sciences Sector Plan, we are launching a 10-year mission to harness the life sciences sector to drive long-term economic growth and build a stronger, prevention-focused NHS.

“We have already started delivering on key actions, from investing up to £600m in the Health Data Research Service alongside Wellcome, through to committing over £650m in Genomics England and up to £354m in Our Future Health.

“This is clear evidence of our commitment and confidence in life sciences as a driver of both economic growth and better health outcomes.”

Governments don’t comment on stories such as these, but you can bet your bottom dollar that the departure of your biggest firm by market value is not the message a government laser-focused on growth can afford to allow.

Business

‘Catastrophic failure’ led to Heathrow power outage – with chances missed to prevent it

Published

7 hours ago

July 2, 2025

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'Catastrophic failure' led to Heathrow power outage - with chances missed to prevent it

A power outage that shut Heathrow Airport earlier this year, causing travel chaos for more than 270,000 passengers, was caused by a “catastrophic failure” of equipment in a nearby substation, according to a new report.

Experts say the fire at the North Hyde Substation, which supplies electricity to Heathrow, started following the failure of a high-voltage electrical insulator known as a bushing, before spreading.

The failure was “most likely” caused by moisture entering the equipment, according to the report.

National Grid, which owns the substation, missed two opportunities to prevent the failure, experts found, the first in 2018 when a higher-than-expected level of moisture was found in oil samples.

Such a reading meant “an imminent fault and that the bushing should be replaced”, according to guidance by the National Grid Electricity Transmission.

However, the report by National Energy System Operator (NESO) said the appropriate responses to such a serious issue were “not actioned”, including in 2022 when basic maintenance was postponed.

“The issue therefore went unaddressed,” the report added.

The design and configuration of the airport’s internal power network meant the loss of just one of its three supply points would “result in the loss of power to operationally critical systems, leading to a suspension of operations for a significant period”, the report added.

Heathrow – which is Europe’s biggest airport – closed for around 16 hours on 21 March following the fire, before reopening at about 6pm.

Around 1,300 flights were cancelled and more than 270,000 air passenger journeys were disrupted.

Tens of millions of pounds were lost, thousands of passengers were stranded, and questions were raised about the resilience of the UK’s infrastructure.

More than 71,000 domestic and commercial customers lost power as a result of the fire and the resulting power outage, the report said.

NESO chief executive, Fintan Slye, said there “wasn’t the control within their [National Grid’s] asset management systems that identified that this [elevated moisture levels] got missed.

“They identified a fault, [but] for some reason the transformer didn’t immediately get pulled out of service and get repaired.

“There was no control within the system that looked back and said ‘oh, hang on a second, you forgot to do this thing over here’.”

Sky’s science and technology editor, Tom Clarke, pointed to the age of the substation’s equipment, saying “some of these things are getting really very old now, coming to the end of their natural lives, and this is an illustration of what can happen if they are not really well maintained”.

The report also highlights a lack of joined-up thinking, he said, as “grid operators don’t know who’s critical national infrastructure on the network, and they don’t have priority”.

Responding to the report’s findings, a Heathrow spokesperson said: “A combination of outdated regulation, inadequate safety mechanisms, and National Grid’s failure to maintain its infrastructure led to this catastrophic power outage.

“We expect National Grid to be carefully considering what steps they can take to ensure this isn’t repeated.

“Our own Review, led by former Cabinet Minister Ruth Kelly, identified key areas for improvement and work is already underway to implement all 28 recommendations.”

In May, Ms Kelly’s investigation revealed that the airport’s chief executive couldn’t be contacted as the crisis unfolded because his phone was on silent.

Energy Secretary Ed Miliband, who commissioned the NESO report, called it “deeply concerning”, because “known risks were not addressed by the National Grid Electricity Transmission”.

Mr Miliband said energy regulator Ofgem, which opened an investigation on Wednesday after the report was published, is investigating “possible licence breaches relating to the development and maintenance of its electricity system at North Hyde.

“There are wider lessons to be learned from this incident. My department, working across government, will urgently consider the findings and recommendations set out by NESO and publish a response to the report in due course.”

National Grid said in a statement it has “a comprehensive asset inspection and maintenance programme in place” and said it has “taken further action since the fire”.

This includes “an end-to-end review” of its oil sampling process and results, further enhancement of fire risk assessments at all operational sites, and “re-testing the resilience of substations that serve strategic infrastructure”.

A spokesperson said: “We fully support the recommendations in the report and are committed to working with NESO and others to implement them. We will also cooperate closely with Ofgem’s investigation.

“There are important lessons to be learnt about cross sector resilience and the need for increased coordination, and we look forward to working with government, regulators and industry partners to take these recommendations forward.”

The Metropolitan Police previously confirmed on 25 March that officers had “found no evidence to suggest that the incident was suspicious in nature”.

Business

UK content creators demand formal recognition from the government

Published

13 hours ago

July 2, 2025

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UK content creators demand formal recognition from the government

The UK’s YouTubers, TikTok creators and Instagram influencers have been surveyed on mass for the first time ever, and are demanding formal recognition from the government.

The creator economy in the UK is thought to employ around 45,000 people and contribute over £2bn to the country in one year alone, according to the new research by YouTube and Public First.

But, despite all that value, its workers say they feel underappreciated by the authorities.

“If you look at the viewership, our channel is not too different from a big media company,” said Max Klymenko, a content creator with more than 10 million subscribers and half a billion monthly views on average.

“If you look at the relevancy, especially among young audiences, I will say that we are more relevant. That said, we don’t really get the same treatment,” he told Sky News.

Fifty-six per cent of the more than 10,000 creators surveyed said they do not think UK creators have a “voice in shaping government policies” that affect them.

Only 7% think they get enough support to access finance, while just 17% think there is enough training and skills development here in the UK.

Nearly half think their value is not recognised by the broader creative industry.

The creative industries minister, Sir Chris Bryant, said the government “firmly recognises the integral role that creators play” in the UK’s creative industries and the fact that they help “to drive billions into the economy” and support more than 45,000 jobs.

“We understand more can be done to help creators reach their full potential, which is why we are backing them through our new Creative Industries Sector Plan,” he said.

“The UK has got a fantastic history of supporting the creative industries,” said Ben Woods, a creator economy analyst, Midia Research who was not involved in the report.

“Whether you look at the film side, lots of blockbuster films are being shot here, or television, which is making waves on the global stage.

“But perhaps the government needs to broaden that lens a little bit to look at just what’s going on within the creator economy as well, because it is highly valuable, it’s where younger audiences are spending a lot of their time and [the UK is] really good at it.”

According to YouTube, formal recognition would mean creators are factored into official economic impact data reporting, are represented on government creative bodies, and receive creator-specific guidance from HMRC on taxes and finances.

For some, financial guidance and clarity would be invaluable; the ‘creator’ job title seems to cause problems when applying for mortgages or bank loans.

“It’s really difficult as a freelancer to get things like mortgages and bank accounts and credit and those types of things,” said podcaster David Brown, who owns a recording studio for creators.

“A lot of people make very good money doing it,” he told Sky News.

“They’re very well supported. They have a lot of cash flow, and they are successful at doing that job. It’s just the way society and banking and everything is set up. It makes it really difficult.”

The creative industries minister said he is committed to appointing a creative freelance champion and increasing support from the British Business Bank in order to “help creators thrive and drive even more growth in the sector”.

The government has already pledged to boost the UK’s creative industries, launching a plan to make the UK the number one destination for creative investment and promising an extra £14bn to the sector by 2035.

These influencers want to make sure they are recognised as part of that.