6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  Chart 6: Bid/offer spreads on gilts  Chart 5: Gilt yields 5 year  10 year  30 year  5 year  Per cent  10 year  Basis points 4  1.6  19 Mar: Further BoE package (Bank rate cut 15bps and additional £ asset purchases)  30 year  19 Mar: Further BoE package  3.6  1.4  3.2  1.2  2.8  1  2.4  0.8  Jan 20  Feb 20  Mar 20  Apr 20  May 20  2  0.6  1.6  0.4  1.2  0.2  0.8  0  0.4  -0.2 Jun 20  Sources: Bloomberg Finance L.P., TradeWeb and Bank calculations  Jan 20  Feb 20  Mar 20  Apr 20  May 20  0 Jun 20  Source: Eikon by Refinitiv  Moment 4: congestion in sterling money markets When our sterling desk received a call from a large asset manager to let us know that – highly unusually – it had been unable to liquidate its holdings of bank certificates of deposit (CDs) to meet a margin call, we knew the dash for cash had reached the sterling money markets. The coming days brought stories of companies and local authorities also seeking liquidity – whether through greater borrowing3, selling assets, or drawing down their holdings in sterling money market funds (MMFs).
Just after 9pm that evening, we received an email from the Federal Reserve: could the dollar swap line central banks speak the following morning? The dollar swap lines may be the most important part of the international financial stability safety net that few have ever heard of. Global trade and investment relies on the dollar. In normal times, firms and local banks located outside the United States can easily secure these dollars using FX swaps, provided by international banks with access to US markets, to exchange their local currency for dollars. In times of turbulence, however, these markets can become impaired, or even seize up altogether, as the international banks batten down the hatches. Trading firms who cannot secure dollars will either have to cease trading altogether, or try to raise dollars in other ways, for example by liquidating dollar-denominated assets. That selling pressure, if allowed to take hold, could trigger, or amplify, global financial instability. 4  All speeches are available online at www.bankofengland.co.uk/news/speeches  4  That Monday night, the first signs of such stress were starting to emerge: the dash for cash had reached FX markets. Falling asset prices and rising panic about the outlook were boosting offshore dollar demand. But international banks’ capacity (and willingness) to meet this demand was becoming impaired – raising the cost of local dollar funding relative to that available to onshore US firms. That divergence was particularly marked in Japan (green line in Chart 3).