UK gilts sell off as Bank of England fails to appease market

UK gilts sell off as Bank of England fails to appease market

A sell-off in UK government bonds has pushed the country’s long-term borrowing costs to their highest level since the Bank of England stepped in to avert a financial market meltdown, the new BoE and government measures failing to reassure investors.

Monday’s drop in gilts came despite the BoE announcing earlier in the day a new short-term funding facility to avoid a “cliff edge” when the emergency bond buying program of £65 billion from the central bank will end this week.

On a day when the UK government also sought to reassure markets by bringing forward the date of a debt reduction plan, the yield on the 30-year gilt jumped 0.29 percentage points to 4.68%. The gilt market has been troubled since the government announced unfunded tax cuts last month.

“We suspect the new measures are insufficient and do not fully recognize the long-term nature of the challenges,” said Daniela Russell, head of UK rates strategy at HSBC, who described the BoE measures as a “plaster sticky”. She added: “The market reaction so far is far from encouraging and is a sign of the precariousness of the situation.”

In a separate attempt to allay market concerns, Chancellor Kwasi Kwarteng has announced that he will publish a new medium-term budget plan and accompanying official forecast on October 31 rather than the previously scheduled date of October 23. november.

Line chart of 30-year gilt yield (%) showing UK borrowing costs skyrocketing

The government also sought to signal its budget credibility by announcing James Bowler, a 20-plus-year Treasury veteran, would lead the department – rather than former frontrunner Antonia Romeo, who lacked Treasury experience.

But Prime Minister Liz Truss’ administration faces a daunting challenge in convincing markets that it is putting debt on a downward path, as its budget plan is likely to contain highly controversial spending cuts.

Monday’s rise was the biggest jump in yields since the BoE launched its contingency plan to prevent the pension system from collapsing due to a previous disorderly fall in gilt markets. Long-term borrowing costs are now approaching the high of 5.1% they reached before the BoE intervened to support the market.

In its statement on Monday, the central bank said it was now ready to step up the pace of purchases before its bond-buying program expired. But he only bought £853million that day, well below his new limit of £10billion. The sale of gilts intensified following the announcement of its purchases.

“I don’t really see the point of saying you’re going to buy 10 billion a day when you’ve only bought a few hundred million so far,” said Peter Schaffrik, macro strategist at RBC. “The real question in the markets is how much are you really willing to spend?”

The big move in gilts suggested another possible “hard sell” by pension funds. Nervous gilt investors interpreted the BoE’s moves as confirmation that the market could turn volatile again when its bond-buying plan ends on Friday.

Simeon Willis, chief investment officer at XPS Pensions Group, added that the sector now has “a similar problem to the one we had two weeks ago”, when soaring bond yields were exacerbated by the £45bn of unfunded tax cuts in the “mini” of Kwarteng. Budget.

These higher yields have forced pension funds to sell gilts to provide guarantees to schemes matching their assets and liabilities – so much so that the BoE has estimated the funds would have sold £50bn had it not been for them. not intervened.

On Monday, the BoE also announced a new short-term lending facility to ease strains on pension funds that use liability-driven investment strategies at the center of market turmoil. It said it would allow a wide range of collateral, including investment-grade corporate bonds, to be used in a new repo facility to ease liquidity pressures.

Peter Chatwell, Head of Macro Trading Strategies at Mizuho, ​​said the new facility would “reduce the need for LDI accounts to force sell to find liquidity, when they can borrow money compared to a wider range of existing BoE guarantees”.

But some investors have been disappointed because the repo facility replaces, rather than complements, continued bond purchases, said ING rates strategist Antoine Bouvet.

“A lot of people thought or hoped the purchase facility would be extended,” he said.

Additional reporting by Mark Wembridge, Adrienne Klasa and Delphine Strauss

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