Global debt rally extends to Asia after BOE intervention

After the Bank of England's surprise bond market intervention caused a rush of short covering and some of the most extreme volatility in months, the global debt rally extended to Asia.

Credit traders said that the yield on Asia investment-grade dollar bonds tightened three to five basis points. According to a Bloomberg index, they widened 10 basis points Wednesday, the biggest blowout since March 2020. Since June, that makes for the most volatile two sessions.

The UK bond market bounced back some of its losses Wednesday, rallying by a record 5.6%, according to a Bloomberg index with data dating back to 1998. The most recent gains in seven weeks were made by government and corporate notes by 0.8%.

Concerns over historically high inflation and tighter monetary tightening by central banks including the Federal Reserve will likely temper a prolonged rally, despite the BOE's dramatic intervention to buy unlimited long-dated bonds that resulted in record gains for gilts.

Pauline Chrystal, portfolio manager at Kapstream Capital in Sydney said that the BOE's emergency bond buying plan is sure to help markets calm down. But the same issues that lead us to be cautious haven't been resolved yet, including inflation in the US. Despite the rally on Wednesday, sterling-denominated debt has lost 26% year-to-date.

The UK Chancellor of the Exchequer Kwasi Kwarteng announced last Friday of the drastic tax cuts triggered a run on British assets due to concerns about the ability of government to fund the move and its potential to accelerate inflation.

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