Rising Yields and Liquidity Challenges: Will Policymakers Step In Again?

The UK gilt market is once again making headlines as bond prices fall and the pound weakens.

The last time we saw a similar situation was in 2022 when policymakers had to intervene to prevent the UK's debt market from collapsing.

That intervention played a key role in influencing the US FED to resume printing money, kick-starting the current bull market.

Across the Atlantic, concerns are also mounting.

The DXY remains strong, and inflation expectations are rising.

Last Friday, markets dropped as strong economic data reignited fears of inflation returning sooner than anticipated.

Consequently, market expectations for rate cuts this year have nearly vanished.

Rising inflation is also driving US Treasury yields higher, making borrowing more expensive for companies and banks.

As we've noted before, inflation poses a significant constraint on liquidity flows.

With the upcoming inflation report on Wednesday expected to show an increase - exacerbated by rising oil prices - these concerns are unlikely to subside.

While the outlook may seem grim, history suggests a potential silver lining.

Both the UK and US bond markets, coupled with a strong DXY, have the capacity to cause major financial disruptions.

However, policymakers have historically stepped in to stabilize markets when faced with such breaches.

Should conditions worsen, a similar intervention can likely be expected.

On the DXY, our stance remains unchanged: while a strong dollar might temporarily aid Trump's trade negotiations, the global economy benefits from a weaker dollar in the long run.

In short, the Fed and other central banks face mounting pressure to maintain liquidity and ensure smooth money flow within the system.

Our Global Liquidity Index declined by $2.754T, representing a 2.16% drop this week.

Liquidity momentum remains weak, with the 3-month rate of change still trailing the 12-month rate of change.

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