UK bond buying to end this Friday but experts say turmoil is the 'lull before the storm'

The Bank of England has made it official that their bond-buying program will end this Friday, contrary to reports in the Financial Times that the central bank had privately indicated to bankers that they may extend it.

Many emerging economies are already paying 10-20 percent on their US dollar-denominated debt due to consistent and aggressive rate hikes from the US Federal Reserve. Over half-a-dozen countries like Sri Lanka, Pakistan, Chad, Ethiopia, and Zambia have defaulted too.

Recently, in a shock to financial markets, a developed market like the UK saw the evaporation of buyers and soaring yields. Andrew Holland of Avendus Alternate Strategies said that the Bank of England has huge amounts of debt and interest costs are rising as well. He termed this situation as a "lull before the storm," adding that he is scared about the global financial situation.

Pension Funds buy hedges or enter into derivative positions to protect the bonds in their portfolio. However, when interest rates rise even above those limits, they have to bring in more collateral, for which they sell more bonds, thereby creating a vicious selling cycle. That caused the UK central bank to step in and buy bonds.

Alvin T Tan of RBC Capital Markets told CNBC-TV18 in an interview that the turn of events in the UK has surprised many. He has cautioned that the risk may spread as yields rise across the world and that further dislocation across asset markets can push the US Dollar even higher.

Tan also believes that the risk of financial accidents has increased with the rise in the US dollar, as well as bond yields.

Eurozone debt is also entering the danger zone. As the spread between the German Bunds and interest rate swap agreements rises, the European Pension Funds are also facing margin calls on their derivative positions.

Meanwhile, the US Federal Reserve, The European Central Bank and the Bank of England are in rate hiking mode as inflation is near double digits in all these countries. "We will see issues in Europe if central banks continue to withdraw liquidity," according to Michael Every of Rabobank, who adds that there is a systemic risk if the inflation fight prolongs.

Suyash Choudhary of IDFC Mutual Fund told CNBC-TV18 that central banks of developed markets have lost their faith in the market to forecast and that financial stability risks in certain markets have overtaken the risk of higher inflation.

Calling the Fed's terminal rate a fair one, RBC's Tan does not expect the central bank to keep raising interest rates at 75 basis points beyond the next policy meeting.