(Boursier.com) — As tension in the British bond market escalated further at midday, the Bank of England warned that some households could face pressure to repay their debt as high as before the 2008 financial crisis. “It will be difficult for some households to manage the projected increases in the cost of basic necessities in parallel with the rise in interest rates,” said the Financial Policy Committee of the Central Bank in its quarterly report.
Overall, households are in a stronger position than before 2008. But if mortgage financing costs continue to rise, some could face pressure on their mortgage and other costs, similar to the spike in before the financial crisis, estimates the BoE.
Rising costs and falling demand will weigh on profits for many companies, especially those with high exposure to energy and fuel prices, the Old Lady of Threadneedle Street also points out. Foreign investors could also choose to avoid UK assets, which could translate into lower prices and tighter credit conditions for households and businesses. There could be a particular impact in areas such as commercial real estate where foreign investors are very present, specifies the Institution.
The British financial markets have been under tension since the announcement on September 23 by the Minister of Finance, Kwasi Kwarteng, of a “mini budget” marked by numerous tax relief measures, in particular for high earners, but without no details on their financing. The surge in bond yields that followed affected some British pension funds, suddenly faced with the need to provide new guarantees to cover positions taken on the derivatives markets.
This ‘panic’ forced the BoE to launch a program of bond purchases on the markets on September 28 in order to contain the rise in yields, purchases of which it doubled the daily ceiling on Monday and then widened the scope of application on Tuesday. “While it may not be reasonable to expect market participants to be hedged against all extreme market outcomes, it is important that lessons are learned from this episode and levels of resilience are ensured,” says the BoE.
The yield on 30-year UK Treasury bonds is currently stretching 17 basis points to 4.94% while that of 20-year briefly exceeded 5% for the first time since September 28 and the emergency intervention of the BoE.
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