Gilt yields plunge after Bank of England steps in to buy at ‘any scale necessary’

By Jamie Chisholm

Yields on UK gilts fell to their highest level in 14 years after the Bank of England said it would buy bonds on “any scale necessary” to restore orderly market conditions.

The yield on the benchmark 10-year gilt, which moves in the opposite direction to prices, fell 49 basis points to 4.03%, after falling below 4% at one point.

Earlier on Wednesday, the yield had risen to 4.6%, up more than 120 basis points in just four trading days, as investors dumped government bonds in response to what they saw as a budget dangerously prodigal of the new chancellor Kwasi Kwarteng.

Kwarteng’s proposal for £45billion in debt-financed tax cuts at a time when inflation was at a nearly 40-year high of 9.9% has been lambasted by the International Monetary Fund.

After further selling on Wednesday, which took the 30-year gilt yield above 5% for the first time in decades, the Bank of England stepped in to calm markets. The 30-year yield slipped 108 basis points to 3.91%, bringing it back below the level before Kwarteng announced the tax cuts.

“The Bank is monitoring financial market developments very closely in light of the significant revaluation of UK and global financial assets,” the BoE said in a statement.

“This revaluation has become more significant over the past day – and it particularly affects UK long-term government debt… In line with its objective of financial stability, the Bank of England stands ready to restore market functioning and reduce the risks of contagion to credit conditions for UK households and businesses,” he added.

Reports emerged on Wednesday that recent sharp declines in gilts and the pound had left some British pension funds facing margin calls of up to £100 million ($107 million) each. In addition, a number of UK banks suspended mortgage offers after bond market volatility left them struggling to price home loans.

The BoE said it would buy long-term UK government bonds to restore order and “purchases will be made on the scale necessary to achieve that result.” It was suspending its planned gilt sales as part of its quantitative tightening program.

“The decision to intervene in the gilt market reveals that the BoE has no intention of raising the discount rate to the level of 6% currently set by the markets,” said Samuel Tombs, economist British Chief at Pantheon Macroeconomics.

“Short rates at this level would mean that many households and businesses would simply not be able to maintain their monthly loan repayments, and pension funds would be unable to meet their obligations, threatening financial stability,” he said. -he adds.

The 2-year Treasury yield fell 34 basis points to 4.27%, even though the central bank is not buying short-term securities.

The Treasury said it had “fully compensated” the BoE’s decision and stressed that although the Chancellor of the Exchequer “is committed to the independence of the Bank of England… The government will continue to work closely with the Bank to support its financial stability and inflation.” Goals.”

“Remarkable, necessary and deeply disturbing”

Krishna Guha, strategist at Evercore ISI, said the BoE’s decision to postpone QT before it starts and launch a new QE program “is remarkable, necessary and deeply worrying.”

“Remarkable because it lays bare the seriousness of the risks to financial stability that are emerging with the unchecked bond market backlash against the UK’s reckless fiscal plans. Necessary because it is the central bank’s job to ensure the market functioning in the central systemically important government debt market, and is proving effective in early trading,” he said.

“Deeply worrying as it leaves past QT plans in disarray, has an uncertain exit and will raise further concerns about the central bank’s independence in carrying out its monetary responsibilities,” Guha added.

The pound initially rebounded but was trading at $1.0683 “We expect the pound to bear the brunt of any further deterioration in foreign investors’ willingness to lend to the UK; the MPC will let it slide to reluctantly,” Pantheon’s Tombs said.

The FTSE 100 rallied on the news but remained down 0.6% on the day. Insurers including Aviva and Legal & General suffered heavy losses.

US stocks opened higher, with the S&P 500 up 0.3% in early trading.

— Steve Goldstein contributed to this report

-Jamie Chisholm

 

(END) Dow Jones Newswire

09-28-22 0953ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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