Bank Of England Begins Bond Market Stress Test

The "system-wide exploratory scenario" (SWES) will combine elements of the shocks observed following both the LDI crisis that arose from the Mini Budget and the ‘dash for cash' at the beginning of the Covid-19 pandemic.

The SWES will model a ten-day scenario, with the first day witnessing yields on 10-year gilts increasing by about 45 basis points, exceeding the largest historical observations.

Overall, the scenario will see a 1.15 percentage point increase in gilt yields, a 1.3 percentage point increase in investment-grade borrowing costs, and a 0.75 percentage point rise in US Treasury yields.

Andrew Bailey warns of risks to world economy posed by 'fragmentation'

The Bank of England has said the scenario was not a forecast, "neither does it represent the bank's expectation of the consequences for financial markets of any particular shock".

The central bank hoped that the SWES would enhance its understanding of the risks to and from non-bank financial institutions, as well as their behaviour in a stress.

Following the test, the central bank will receive responses from institutions in January and produce a report on the exercise by the end of next year.

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