Was last fall’s UK Treasury crisis a warning bell for SVB?

Nicole Goodkind

Investors might not have to look so far back to see their own future.

Six months ago an alarm went off in the United Kingdom, when the gilt market (UK government bonds) spun out of control. We may be hearing that same siren across the pond today.

Back in September, former Prime Minister Liz Truss unveiled a huge package of tax cuts, spending and increased borrowing aimed at getting the economy moving. Markets feared the plan would drive up already persistent inflation, forcing the Bank of England to push interest rates significantly higher. As a result, investors dumped UK government bonds, sending yields on some of that debt soaring at the fastest rate on record.

The scale of the tumult put enormous pressure on many pension funds by upending an investing strategy that involves the use of derivatives to hedge their bets.

As the price of government bonds crashed, the funds were asked to pony up billions of pounds in collateral. In a scramble for cash, investment managers were forced to sell whatever they could — including, in some cases, more government bonds. That sent yields even higher, sparking another wave of margin calls.

Here’s the takeaway: The Bank of England was able to bring things back under control quickly by launching into crisis mode. After working through the night, it stepped into the market the day after the plunge with a pledge to buy up to £65 billion ($73 billion) in bonds if needed. That stopped the bleeding and averted what the central bank later told lawmakers was its worst fear: a “self-reinforcing spiral” and “widespread financial instability.”

US authorities are acting in similar ways today.

On Sunday, the Federal Reserve announced a new emergency lending program which would deliver cash to banks facing steep losses because of higher interest rates. Chair Jerome Powell also announced on Monday that the central bank would launch a review into what went wrong at SVB.

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