What on earth is happening in UK markets and why is the Bank of England struggling to address it?
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.
Read more:
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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.
Water company United Utilities has reported hundreds of millions in profit as it seeks to further increase customer bills.
The utility serving seven million customers in the northwest of England recorded £335.7m in underlying operating profits for the first half of this year, up nearly 23% from £271.1m a year ago.
It comes as the firm has requested bills rise 32% to make them among the most expensive in England and Wales.
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The proposed average annual bill would increase to £584 by 2030 from the £443 typical yearly charge in the 2023/2024 financial year. Since April 2023 bills have been upped 6.4% and then 7.9%.
Bills hikes were behind the rise in revenue to more than £1.08bn from £975.4m in 2023.
Other ways of assessing profit were lower than the underlying operating sum. Profit before tax reached £140.6m while after tax profit topped £103.1m for the six months to the end of September 2024, both lower than a year earlier.
Boss’s pay
Bonus and benefits payments worth £1.416m were paid to two executives on top of £1.128m in base pay, according to analysis of company filings done by the Liberal Democrats.
It’s down compared with 2022/2023 when three executives were given £1.6m in base pay and £2.456m in bonuses and benefits.
Read more:
Water giant United Utilities strikes £1.8bn pension deal
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The environment
In a year of record sewage outflows into waterways the company was one of just three firms that met the Environment Agency’s top four-star performance ranking.
United Utilities in July came under investigation by water regulator Ofwat for not meeting its obligation to minimise pollution.
In response the company said at the time: “We understand and share people’s concerns about the health of the environment and the operation of wastewater systems, including combined sewer overflows.”
Pension “mega funds” will be created under government plans to increase infrastructure investment.
Reforms could “unlock £80 billion” of investment, according to Treasury plans, which say fewer but larger funds can get greater returns.
Chancellor Rachel Reeves wants to imitate the way large Canadian and Australian pension schemes work.
She said it marks “the biggest set of reforms to the pensions market in decades” ahead of providing more details in a speech at Mansion House on Thursday evening.
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Almost 90 local government pension pots will be grouped together, with defined contribution schemes merged and assets pooled together.
This is part of the government’s plan to increase economic growth through investing in infrastructure.
Pension schemes get greater returns when they reach around £20bn to £50bn as they are “better placed to invest in a wider range of assets”, according to the government.
This is backed up by evidence from Canada and Australia, the government argues – with Canada’s schemes investing four times more in infrastructure, and Australia three times more than the UK’s defined contribution schemes.
Rachel Reeves wants to reform pensions. Pic: PA
Pensions minister Emma Reynolds told Sky News larger pension schemes are able to invest “in a more diverse range of assets, including private equity, which are higher risk, but over time give a higher return”.
She said the government will not tell pension fund managers they must invest more in private equity but due to the larger scale they will be able to invest in a “broader range of assets, and that’s what we see in Canada and Australia”.
Ms Reynolds added that a Canadian teacher or an Australian professor is currently more likely to be invested in British infrastructure or British high-growth companies than a British saver, which she said is “wrong”.
The chancellor has said the changes would “unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off”.
However, Tom Selby, the director of public policy at financial company AJ Bell, said: “There needs to be some caution in this push to use other people’s money to drive economic growth. It needs to be made very clear to members what is happening with their money.”
The government says the funds will be regulated by the Financial Conduct Authority and will need to “meet rigorous standards to ensure they deliver for savers”.
Read more:
Reeves to unveil plans for radical payments shake-up
Chancellor eyes Canada-style pension reform
Reeves to woo Canadian pension funds amid ‘Big Bang’ push
Local government pensions v defined contributions
The Local Government Pension Scheme in England and Wales will manage assets worth around £500bn by 2030.
These assets are currently split across 86 different administering authorities, with local government officials and councillors managing each fund.
Under the government plans, the management of local government pensions and what they invest in will be moved from councillors and local officials to “professional fund managers”.
This will allow them to invest more in assets such as infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants, the government said.
Defined contribution pension schemes are set to manage £800bn worth of assets by the end of the decade.
There are around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The government will consult on setting a minimum size requirement for these funds.
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Businesses cautious – but pensions sector backs plans
Businesses will need to be reassured that the government’s plans are watertight following the fallout from the budget, according to the trade group the Confederation of British Industry (CBI).
The CBI’s chief economist Louise Hellem said: “While the chancellor is right to concentrate on mobilising investment, putting pension reform to work for the government’s growth mission, unlocking investment also needs competitive and profitable businesses.
“With the budget piling additional costs on firms and squeezing their headroom to invest, the government needs to work hard to regain the confidence in the UK as a place businesses and communities can succeed.
“Pension schemes will want to operate within a UK economy that is prospering.”
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But key parts of the pensions sector gave their backing to the government’s plans, including Standard Life, Royal London, Local Pensions Partnership Investments and the Pensions and Lifetime Savings Association.
Deputy Prime Minister Angela Rayner said: “This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”
Consumer rights group Which? is suing Apple for £3bn over the way it deploys the iCloud.
If the lawsuit succeeds, around 40 million Apple customers in the UK could be entitled to a payout.
The lawsuit claims Apple, which controls iOS operating systems, has breached UK competition law by giving its iCloud storage preferential treatment, effectively “trapping” customers with Apple devices into using it.
It also claims the company overcharged those customers by stifling competition.
The rights group alleges Apple encouraged users to sign up to iCloud for storage of photos, videos and other data while simultaneously making it difficult to use alternative providers.
Which? says Apple doesn’t allow customers to store or back-up all of their phone’s data with a third-party provider, arguing this violates competition law.
The consumer rights group says once iOS users have signed up to iCloud, they then have to pay for the service once their photos, notes, messages and other data go over the free 5GB limit.
“By bringing this claim, Which? is showing big corporations like Apple that they cannot rip off UK consumers without facing repercussions,” said Which?’s chief executive Anabel Hoult.
“Taking this legal action means we can help consumers to get the redress that they are owed, deter similar behaviour in the future and create a better, more competitive market.”
Apple ‘rejects’ claims and will defend itself
Apple “rejects” the idea its customers are tied to using iCloud and told Sky News it would “vigorously” defend itself.
“Apple believes in providing our customers with choices,” a spokesperson said.
“Our users are not required to use iCloud, and many rely on a wide range of third-party alternatives for data storage. In addition, we work hard to make data transfer as easy as possible – whether it’s to iCloud or another service.
“We reject any suggestion that our iCloud practices are anti-competitive and will vigorously defend against any legal claim otherwise.”
It also said nearly half of its customers don’t use iCloud and its pricing is inline with other cloud storage providers.
Keep up with all the latest news from the UK and around the world by following Sky News
How much could UK Apple customers receive if lawsuit succeeds?
The lawsuit will represent all UK Apple customers that have used iCloud services since 1 October 2015 – any that don’t want to be included will need to opt out.
However, if consumers live abroad but are otherwise eligible – for example because they lived in UK and used the iCloud but then moved away – they can also opt in.
The consumer rights group estimates that individual consumers could be owed an average of £70, depending on how long they have been paying for the services during that period.
Apple is facing a similar lawsuit in the US, where the US Department of Justice is accusing the company of locking down its iPhone ecosystem to build a monopoly.
Apple said the lawsuit is “wrong on the facts and the law” and that it will vigorously defend against it.
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Big tech’s battles
This is the latest in a line of challenges big tech companies like Apple, Google and Samsung have faced around anti-competitive practices.
Most notably, a landmark case in the US earlier this year saw a judge rule that Google holds an illegal monopoly over the internet search market.
The company is now facing a second antitrust lawsuit, and may be forced to break up parts of its business.
Read more: Google faces threat of being broken up
File pic: Reuters
And in December last year, a judge declared Google’s Android app store a monopoly in a case brought by a private gaming company.
“Now that five companies control the whole of the internet economy, there’s a real need for people to fight back and to really put pressure on the government,” William Fitzgerald, from tech campaigning organisation The Worker Agency, told Sky News.
William Fitzgerald at Lisbon’s Web Summit, where he spoke to Sky News
“That’s why we have governments; to hold corporations accountable, to actually enforce laws.”
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