Great Britain Offers a Preview of Coming Attractions

Great Britain is a good preview of how a crisis can unfold when higher interest costs impact a bond market. A new Prime Minister in the UK made a policy error (arguably) by promising tax cuts and increased social spending to cap the costs of higher electricity for businesses and citizens. The UK bond and currency markets had a negative reaction. As you can see in the chart below the Great British Pound (GBP) began to depreciate rapidly (white line in chart below). Simultaneously, interest rates in the UK began to increase quite rapidly (blue line in chart below). What had started out as a trend during 2021 and the first half of 2022 quickly turned into a rout.