For all the attention grabbed by sterling’s wild gyrations in the three weeks since the chancellor’s mini-budget, the real action has been in the market for British government bonds, known as gilts. The pound going up or down a few percentage points does matter: a weaker pound increases the cost of imported goods such as energy and food, and feeds through into inflation and living standards. But those impacts pale into insignificance compared with the pain that can be delivered by the gilts market.
Over the last month, the price moves in this market have, in the usually cautious words of the Bank of England, raised a “material risk” of a breakdown in financial stability, coming close to a “fire sale dynamic”. The interest rate, or yield, on British government borrowing has shot up with almost unprecedented speed. The move in September was the largest monthly increase in any major economy since at least 1987. That was enough to force the Bank to intervene in an attempt to restore a sense of orderliness in an operation that is due to end on Friday 14 October.
