Gilts sell off as Bank of England reiterates plan to end bond-buying scheme

Gilts sell off as Bank of England reiterates plan to end bond-buying scheme

A sell-off in UK government bonds accelerated on Wednesday, sending long-term borrowing costs higher after the Bank of England reiterated its plans to halt its emergency gilt buying scheme as scheduled on Friday.

The central bank said on Wednesday morning that it “has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October”.

The BoE added that it had “made absolutely clear in contact with the banks at senior levels” that it will end its scheme this week. The Financial Times reported earlier on Wednesday that BoE officials had briefed lenders in private that it was prepared to extend the programme beyond Friday’s deadline if market volatility flares up again.

The UK 30-year yield rose 0.2 percentage points to 5 per cent, as selling gathered pace after the BoE’s announcement. Long-term yields are now closing in on levels that prompted the central bank to launch its initial intervention in the gilt market on September 28. Bond yields rise as their prices fall.

The latest bout of selling comes after BoE governor Andrew Bailey warned pension funds late on Tuesday that they have “three days left” before support ends.

“The lack of certainty is creating real challenges [for trustees],” said Andrew Coles, chief executive of Isio, a pension advisory firm. “On the one hand we have an official line which is the deadline is Friday, then stories leak through that if the markets react we might step in. This does not give certainty for trustees and schemes trying to prepare.”

The pound steadied on Wednesday, having dropped sharply after the BoE governor spoke in Washington on Tuesday evening. Sterling was 0.8 per cent higher against the dollar at $1.105 in London morning trading.

The central bank has been rushing to contain the fallout from chancellor Kwasi Kwarteng’s package of unfunded tax cuts unveiled last month, which sent sterling and the gilt market into a tailspin, triggering a liquidity crisis among pension funds.

The BoE staged two further emergency interventions earlier this week, increasing the maximum size of its purchases and widening them to include inflation-linked bonds. With three days of buying left before Friday, the central bank has purchased £8.8bn of bonds, far below the potential size of the £65bn programme.

“Everybody appears to be building the boat while they are sailing it,” said Richard McGuire, a fixed-income strategist at Rabobank.

He added that the lack of clarity over the BoE’s intentions had compounded the information vacuum over how the government plans to get borrowing on a sustainable footing. Kwarteng will publish a medium-term plan on how to cut debt on October 31.

McGuire said: “All this uncertainty and U-turns are bad from a market perspective. The BoE is desperately attempting to obscure the symptoms of the problem because it can’t address the root cause: a credibility problem after the government’s “mini” Budget.”

But, speaking to the BBC, Jacob Rees-Mogg, the UK’s business secretary, suggested the blame for the market turmoil lay with the BoE rather than the government.

“What has caused the effect in pension funds, because of some quite high risk but low probability investment strategies, is not necessarily the mini budget,” the minister said. “It could just as easily be the fact that the day before the Bank of England did not raise interest rates as much as the Federal Reserve did.”

The Bank of England increased rates by 0.5 per cent to 2.25 per cent on September 22, a day after the Fed put in place a third consecutive 0.75 per cent rise in the US.

Quoted from Various Sources

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