The UK has made an unholy mess of things. The Boris-Brexit nonsense, the inept handling of COVID and now the Truss unfunded tax cuts which collapsed the gilt market and brought most pension funds to within a hair of going under (via LDI leverage). In my 40 year career in financial markets I have never seen sovereign debt of a major G7 nation collapse as fast and spectacularly as UK's gilts.
I am afraid that we are witnessing only the opening act of this drama. Even at current sharply higher yields, gilt returns are still far below inflation - see chart below. If you are a buy and hold fundamental investor (say, an insurance company) would you buy right now at negative real interest rates when national politics are cratering? Or would you unload the stuff from your portfolio and stay away for a while? At the very least, you will not invest more.
Black Swan Warning: has anyone modeled the UK going bankrupt? Because gilt prices dropping off a cliff sure points that way. And I don’t think the IMF has enough money for a rescue of this size, this time around.
UK 10 Year Gilt Yield (red) And Inflation (blue)
Speaking of Black Swans: what’s the fundamental difference, if any, between the chart above and the chart below?