Elevated volatility is a key feature of markets today. The United Kingdom saw some particularly sharp moves in late September in response to a fiscal policy announcement known as the mini budget. The volatility created havoc in an unexpected place—the domestic pensions sector—and only a timely Bank of England intervention prevented a crisis that might have spiraled beyond U.K. borders.

The proposed mini budget raised investors’ concerns about future inflation and U.K. debt sustainability. In response, sterling fell against the dollar and euro, and bond prices fell across a range of maturities. The speed at which bond prices fell exposed vulnerabilities in strategies that certain pension funds had used to manage their balance sheet. It forced them into bond sales amid margin calls.

The near-crisis appears to have abated after a new chancellor was appointed and the government reversed course on much of the mini budget. But it is worth stepping back and considering why markets are volatile. A combination of factors has contributed, including the strong post-COVID recovery and tight labor market, the war in Ukraine and European energy crisis, and central banks’ efforts to tackle multidecade-high inflation. To return inflation to their 2% target, central banks in the United States, the euro area, and the U.K. have communicated the need to continue raising rates in earnest, such that high inflation does not become embedded into the economy.

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