The Bank of England insists its gilt buying programme will end on Friday
(Picture: PA Wire)The crisis in the gilts market dramatically worsened again today as yields rose sharply amid confusion over the Bank of England’s emergency buying programme.
By late morning the yield on the 30 year gilt was up 25 basis points 5.027% the highest since the Bank’s intervention began at the end of last month.
The 20 year gilt was yielding 5.1%, up 18bps, its highest level since the global financial crisis.
The latest turmoil on trading floors followed mixed signals from the Bank of England around a potential extension to its intervention in the government debt market.
Governor Andrew Bailey said overnight that the £65 billion scheme to buy long-dated UK government bonds would end on Friday. “We will be out by the end of the week,” he said, speaking in Washington at an even run by Institute of International Finance.
That sounded like a straight rejection of calls from within the pension industry for it to continue, at least until the next update on the government’s tax and spending plans, which the Treasury brought forward to October 31 from November 23.
Then, the Financial Times reported this morning that the BoE had signalled privately to bankers that the scheme could continue.
Next came a statement from the BoE that it had “made absolutely clear” to senior figures in banks that the intervention would end as scheduled.
It was brought in amid heavy selling of UK government bonds after the so-called “mini-Budget” on September 23 undermined the market’s faith in the investment case for UK assets, with unfunded tax cuts creating the need for a £62 billion rise in borrowing to cover their impact on the public finances.
Pension funds were having trouble selling their holdings of the bonds in order to meet their complex blend of financial commitments, including meeting their own obligations relating to borrowing in corner of the market known as Liability Driven Investments or LDIs. The BoE’s support is designed to allow them time to put their house in order in this respect.
“We think the rebalancing must be done,” Bailey said.
Francesco Pesole, FX strategist at Dutch bank ING said: “Bailey’s speech and the FT report are indeed contradictory but not entirely inconsistent, as the BoE is likely fearing that the pledge of longer-term intervention would discourage pension funds to de-lever.”
Joshua Raymond, director at online investment platform XTB.com said: “We’ve seen a marked deterioration in UK bond markets today, with long term Gilt yields racing back to the same highs that triggered the Bank of England’s interventions. UK 10yr bond yields are trading back at 4.56% whilst 30yr yields are also at 5%. The mixed messaging from the BoE last night towards extending its bond buying scheme has been problematic.
“The market has long called the BoE’s actions to curb spiraling inflation too slow and weak. Now we have Governor Bailey telling an audience in Washington that the BoE’s bond buying will cease on Friday and for pension funds to get their houses in order, only for that sentiment to be quickly reversed after private conversations with banks were leaked to show the central bank could extend its scheme.
“The timing of this confusion is bad and it’s had the reverse effect of helping investor confidence. It’s no surprise therefore yields have raced higher yet again today.
