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

Magnum debut suffers a chill as Ben & Jerry’s row lingers

Published

22 hours ago

December 8, 2025

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Magnum debut suffers a chill as Ben & Jerry's row lingers

Shares in The Magnum Ice Cream Company (TMICC) have fallen slightly on debut after the completion of its spin-off from Unilever amid a continuing civil war with one of its best-known brands.

Shares in the Netherlands-based company are trading for the first time following the demerger.

It creates the world’s biggest ice cream company, controlling around one fifth of the global market.

Primary Magnum shares, in Amsterdam, opened at €12.20 – down on the €12.80 reference price set by the EuroNext exchange, though they later settled just above that level, implying a market value of €7.9bn – just below £7bn.

The company is also listed in London and New York.

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Unilever stock was down 3.1% on the FTSE 100 in the wake of the spin off.

The demerger allows London-headquartered Unilever to concentrate on its wider stable of consumer brands, including Marmite, Dove soap and Domestos.

The decision to hive off the ice cream division, made in early 2024, gives a greater focus on a market that is tipped to grow by up to 4% each year until 2029.

But it has been dogged by a long-running spat with the co-founders of Ben & Jerry’s, which now falls under the TMICC umbrella and accounts for 14% of group revenue.

Unilever bought the US brand in 2000, but the relationship has been sour since, despite the creation of an independent board at that time aimed at protecting the brand’s social mission.

The most high-profile spat came in 2021 when Ben & Jerry’s took the decision not to sell ice cream in Israeli-occupied Palestinian territories on the grounds that sales would be “inconsistent” with its values.

Unilever responded by selling the business to its licensee in Israel.

A series of rows have followed akin to a tug of war, with Magnum refusing repeated demands by the co-founders of Ben & Jerry’s to sell the brand back.

Magnum and Unilever argue its mission has strayed beyond what was acceptable back in 2000, with the brand evolving into one-sided advocacy on polarising topics that risk reputational and business damage.

TMICC is currently trying to remove the chair of Ben & Jerry’s independent board.

It said last month that Anuradha Mittal “no longer meets the criteria” to serve after internal investigations.

An audit of the separate Ben & Jerry’s Foundation, where she is also a trustee, found deficiencies in financial controls and governance. Magnum said the charitable arm risked having funding removed unless the alleged problems were addressed.

The Reuters news agency has since reported that Ms Mittal has no plans to quit her roles, and accused Magnum of attempts to “discredit” her and undermine the authority of the independent board.

Magnum boss Peter ter Kulve said on Monday: “Today is a proud milestone for everyone associated with TMICC. We became the global leader in ice cream as part of the Unilever family. Now, as an independent listed company, we will be more agile, more focused, and more ambitious than ever.”

Commenting on the demerger, Hargreaves Lansdown equity analyst Aarin Chiekrie said: “TMICC is already free cash flow positive, and profitable in its own right. The balance sheet is in decent shape, but dividends are off the cards until 2027 as the group finds its footing as a standalone business.

“That could cause some downward pressure on the share price in the near term, as dividend-focussed investment funds that hold Unilever will be handed TMICC shares, the latter of which they may be forced to sell to abide by their investment mandate.”

Business

Netflix takeover of Warner Bros ‘could be a problem’, Donald Trump says

Published

1 day ago

December 8, 2025

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Netflix takeover of Warner Bros 'could be a problem', Donald Trump says

Donald Trump has said he will be “involved” in the decision on whether Netflix should be allowed to buy Warner Bros, as the $72bn (£54bn) deal attracts a media industry backlash.

The US president acknowledged in remarks to reporters there “could be a problem”, acknowledging concerns over the streaming giant’s market dominance.

Crucially, he did not say where he stood on the issue.

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It was revealed on Friday that Netflix, already the world’s biggest streaming service by market share, had agreed to buy Warner Bros Discovery’s TV, film studios and HBO Max streaming division.

The deal aims to complete late next year after the Discovery element of the business, mainly legacy TV channels showing cartoons, news and sport, has been spun off.

But the deal has attracted cross-party criticism on competition grounds, and there is also opposition in Hollywood.

The Writers Guild of America said: “The world’s largest streaming company swallowing one of its biggest competitors is what antitrust laws were designed to prevent.

“The outcome would eliminate jobs, push down wages, worsen conditions for all entertainment workers, raise prices for consumers, and reduce the volume and diversity of content for all viewers.”

Republican Senator, Roger Marshall, said in a statement: “Netflix’s attempt to buy Warner Bros would be the largest media takeover in history – and it raises serious red flags for consumers, creators, movie theaters, and local businesses alike.

“One company should not have full vertical control of the content and the distribution pipeline that delivers it. And combining two of the largest streaming platforms is a textbook horizontal Antitrust problem.

“Prices, choice, and creative freedom are at stake. Regulators need to take a hard look at this deal, and realize how harmful it would be for consumers and Western society.”

Paramount Skydance and Comcast, the parent company of Sky News, were two other bidders in the auction process that preceded the announcement.

The Reuters news agency, citing information from sources, said their bids were rejected in favour of Netflix for different reasons.

Paramount’s was seen as having funding concerns, they said, while Comcast’s was deemed not to offer so many earlier benefits.

Paramount is run by David Ellison, the son of the Oracle tech billionaire Larry Ellison, who is a close ally of Mr Trump.

The president said of the Netflix deal’s path to regulatory clearance: “I’ll be involved in that decision”.

On the likely opposition to the deal. he added: “That’s going to be for some economists to tell. But it is a big market share. There’s no question it could be a problem.”

Business

Young people may lose benefits if they don’t engage with help from new £820m scheme, government warns

Published

1 day ago

December 8, 2025

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Young people may lose benefits if they don't engage with help from new £820m scheme, government warns

Young people could lose their right to universal credit if they refuse to engage with help from a new scheme without good reason, the government has warned.

Almost one million will gain from plans to get them off benefits and into the workforce, according to officials.

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It comes as the number of young people not in employment, education or training (NEET) has risen by more than a quarter since the COVID pandemic, with around 940,000 16 to 24-year-olds considered as NEET as of September this year, said the Office for National Statistics.

That is an increase of 195,000 in the last two years, mainly driven by increasing sickness and disability rates.

The £820m package includes funding to create 350,000 new workplace opportunities, including training and work experience, which will be offered in industries including construction, hospitality and healthcare.

Around 900,000 people on universal credit will be given a “dedicated work support session”.

That will be followed by four weeks of “intensive support” to help them find work in one of up to six “pathways”, which are: work, work experience, apprenticeships, wider training, learning, or a workplace training programme with a guaranteed interview at the end.

However, Work and Pensions Secretary Pat McFadden has warned that young people could lose some of their benefits if they refuse to engage with the scheme without good reason.

“Doing nothing should not be an option,” he told Sky News’ Sunday Morning with Trevor Phillips.

“If someone just took that attitude, yes, they would then be subject to, you know, the obligations that are already part of the system.”

“What I want to see is young people in the habit of getting up in the morning, doing the right thing, going to work,” he added.

“That experience of that obligation, but also the sense of pride and purpose that comes with having a job.”

The government says these pathways will be delivered in coordination with employers, while government-backed guaranteed jobs will be provided for up to 55,000 young people from spring 2026, but only in those areas with the highest need.

However, shadow work and pensions secretary Helen Whately, from the Conservatives, said the scheme is “an admission the government has no plan for growth, no plan to create real jobs, and no way of measuring whether any of this money delivers results”.

She told Sky News the proposals are a “classic Labour approach” for tackling youth unemployment.

“What we’ve seen today announced by the government is funding the best part of £1bn on work placements, and government-created jobs for young people. That sounds all very well,” she told Sunday Morning with Trevor Phillips.

“But the fact is, and that’s the absurdity of it is, just two weeks ago, we had a budget from the chancellor, which is expected to destroy 200,000 jobs.

“So the problem we have here is a government whose policies are destroying jobs, destroying opportunities for young people, now saying they’re going to spend taxpayers’ money on creating work placements. It’s just simply the wrong answer.”

Ms Whately also said the government needs to tackle people who are unmotivated to work at all, and agreed with Mr McFadden on taking away the right to universal credit if they refuse opportunities to work.

But she said the “main reason” young people are out of work is because “they’re moving on to sickness benefits”.

Ms Whately also pointed to the government’s diminished attempt to slash benefits earlier in the year, where planned welfare cuts were significantly scaled down after opposition from their own MPs.

The funding will also expand youth hubs to help provide advice on writing CVs or seeking training, and also provide housing and mental health support.

Some £34m from the funding will be used to launch a new “Risk of NEET indicator tool”, aimed at identifying those young people who need support before they leave education and become unemployed.

Monitoring of attendance in further education will be bolstered, and automatic enrolment in further education will also be piloted for young people without a place.