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From the U.K.’s abrupt intervention in the gilt market to Japan’s simultaneous withdrawal and injection of liquidity, the global economy is facing “elevated risks” similar to that of the leadup to the Great Financial Crisis, Lawrence Summers, the former U.S. Treasury secretary, said Thursday.
“In the same way that people became anxious in August of 2007, I think this is a moment when there should be increased anxiety,” Summers told Bloomberg Television in an interview.
Summers pointed to an array of mounting risks such as uncertainty about the outlook in economic policy, heightened geopolitical tensions amid Russia’s invasion of Ukraine, and significant leverage against a backdrop of rising interest rates and persistently high inflation.
Earlier this week, the Bank of England stepped in to buy long-dated bonds to ease the upward pressure seen in gilt yields as well as the falling pound despite looming inflationary pressures. At the time of writing, the 10-year gilt yield, though, rose 15 basis points to 4.15% after retreating briefly post-BoE announcement.
And the sterling, albeit rebounding from its all-time low of $1.0350, remains in suppressed terrain as the new U.K. government budget of tax cuts and spending worried traders. The cable cross rate stood at $1.10 in afternoon trading. Bear in mind most of its central bank peers are in tightening mode in the face of multi-decade high inflation.
“When a country as major as Britain is going through something like this, that is something that can have consequences that go beyond,” Summers explained to Bloomberg.
Elsewhere, Japan recently intervened to boost the yen for the first time since the late ’90s after the currency hit a 24-year low against the greenback. At the same time, the Bank of Japan, in a move to defend its yield-curve-control policy, held its benchmark interest rates at ultra-low levels. Summers told Bloomberg that it’ll be interesting to see how Japan’s conflicting policies play out.
Related ETFs: Invesco CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB), iShares MSCI United Kingdom (NYSEARCA:EWU), iShares MSCI Japan (NYSEARCA:EWJ) and Invesco CurrencyShares Japanese Yen Trust (NYSEARCA:DXJ).
Earlier on Thursday, global bond yields on the march higher again.
