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UK bond yields plunge after Bank of England steps in to buy ‘to whatever extent necessary’




UK gilt yields fell back from a 14-year high after the Bank of England said it would buy bonds to “whatever extent necessary” to restore orderly market conditions.

The 10-year gilt yield benchmark TMBMKGB-10Y,
4.001%,
which moves in the opposite direction of prices, fell 49 basis points to 4.03%, after dipping 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 dangerously lavish budget by new chancellor Kwasi Kwarteng.

Mr Kwarteng̵[ads1]7;s proposal for £45 billion in debt-financed tax cuts at a time when inflation was hovering at an almost 40-year high of 9.9% was rejected by the International Monetary Fund.

After further selling on Wednesday, which took the 30-year gilt yield TMBMKGB-30Y,
3.921%
above 5% for the first time in decades, the Bank of England stepped in to calm the markets. The 30-year yield fell 108 basis points to 3.91%, taking it below the level before Kwarteng announced the tax cuts.

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

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

See also: Here are the bonds the Bank of England will buy

Reports emerged on Wednesday that recent sharp declines in the gilt and pound had left some UK pension funds facing margin calls of as much as £100 million ($107 million) each. Also, a number of UK banks had suspended mortgage offers after volatility in the bond market left them struggling to price mortgages.

The BoE said it would buy long-dated UK government bonds to restore order and “the purchases will be made on the scale necessary to achieve this outcome.” It suspended the planned sale of gilt under its quantitative tightening program.

“The decision to intervene in the gilt market reveals that the BoE has no intention of raising the bank rate all the way to the 6% level now priced in by markets,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“Short interest rates at that level would mean that many households and businesses would simply not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability,” he added.

The return on the 2-year treasury TMBMKGB-02Y,
4.196%
fell 34 basis points to 4.27%, although the central bank does not buy short-dated securities.

The Treasury said it “fully indemnifies” the BoE’s move and stressed that while the Chancellor of the Exchequer “is committed to the Bank of England’s independence … The Government will continue to work closely with the Bank to support its financial stability and inflation targets.”

“Remarkable, necessary and deeply troubling”

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

“Remarkable because it reveals the seriousness of the risks to financial stability emerging with the unchecked backlash from the bond market against reckless UK fiscal plans. Necessary because it is the central bank’s responsibility to ensure market functioning in the systemically important core sovereign debt market, and is proving effective in early trade, he said.

“Deeply worrying because it leaves previous QT plans in disarray, has an uncertain outcome, and will raise further concerns about the central bank’s independence in exercising its monetary responsibilities,” Guha added.

Pound GBPUSD,
+0.93%
initially refuted but traded lower at $1.0683 “We expect sterling to bear the brunt of any further deterioration in foreign investors’ willingness to lend to the UK; MPC will reluctantly let it slide,” said Pantheon’s Tombs.

FTSE 100 UKX,
+0.30%
rose on the news but was down 0.6% on the day. Insurance companies including Aviva AV,
-4.87%
and legal and general LGEN,
-5.61%
such great losses.

US stocks opened higher, with the S&P 500 SPX,
+1.37%
up 0.3% in early trade.

— Steve Goldstein contributed to this report



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