A sell-off in UK government bonds pushed the country’s long-term borrowing costs to their highest point since the Bank of England stepped in to avert a financial market collapse, as new BoE and government measures failed to reassure investors.
Monday’s fall in gilts came despite the BoE announcement earlier in the day of a new short-term funding facility to avoid a “cliff edge” when the central bank’s £65bn emergency bond-buying programme ends this week.
On a day when the UK government also sought to reassure markets by bringing forward the date of a debt-cutting plan, the 30-year gilt yield jumped 0.29 percentage points to 4.68 per cent. The gilt market has been unsettled since the government announced unfunded tax cuts last month.
“We suspect the new measures are insufficient and do not fully recognise the long-term nature of the challenges,” said Daniela Russell, head of UK rates strategy at HSBC, who described the BoE’s moves as a “sticking plaster”. She added: “The market reaction so far has been far from encouraging and is a sign of how precarious the situation may still be.”
In a separate attempt to assuage market concerns, chancellor Kwasi Kwarteng announced he would publish a new medium-term fiscal plan and accompanying official forecasts on October 31 rather than on the previously scheduled date of November 23.
The government also sought to signal its fiscal credibility by announcing that James Bowler, a Treasury veteran of more than 20 years, would head the department — rather than the previous favourite Antonia Romero, who lacked Treasury experience.
But the administration of prime minister Liz Truss faces a daunting challenge in convincing the markets it is putting debt on a downward path, since its fiscal plan is likely to contain highly contentious spending cuts.
Monday’s rise was the biggest increase in yields since the BoE launched its emergency plan to prevent the pension system from collapsing due to a previous disorderly slide in the gilt markets. Long-term borrowing costs are now nearing the 5.1 per cent peak they hit before the BoE initially stepped in to shore up the market.
In its statement on Monday, the central bank said it was now prepared to step up the pace of purchases before its bond-buying programme expires. But it bought just £853mn on the day, far short of its new £10bn limit. Gilt selling intensified following the announcement of its purchases.
“I don’t really see the point in saying you’ll buy ten billion a day when you’ve only been buying a few hundred million up until now,” said Peter Schaffrik, macro strategist at RBC. “The real question the markets have is how much are you actually willing to spend?”
The big move in gilts suggested possible further “forced selling” by pensions funds. Nervous gilt investors interpreted the BoE’s measures as confirmation that the market may become unstable again when its bond-buying scheme ends on Friday.
Simeon Willis, chief investment officer at XPS Pensions Group, added that the industry now has “a similar problem that we had two weeks ago”, when the surge in bond yields was exacerbated by the £45bn in unfunded tax cuts in Kwarteng’s “mini” Budget.
Those higher yields forced pension funds to sell gilts to provide collateral for schemes to match their assets and liabilities — so much so that the BoE estimated that the funds would have sold £50bn if it had not intervened.
On Monday, the BoE also announced a new short-term lending facility to ease strains on pension funds that use the liability-driven investing strategies at the centre of the market turmoil. It said it would allow a broad 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 cash versus a wider range of existing collateral from the BoE”.
But some investors were disappointed because the repo facility is a replacement for, rather than a complement to, continued bond buying, said ING rates strategist Antoine Bouvet.
“A lot of people thought or hoped that the purchase facility would be extended,” he said.
Additional reporting by Mark Wembridge, Adrienne Klasa and Delphine Strauss