UK gilt prices rocket after Bank of England steps into market

1:32 pm Wednesday, September 28th, 2022

By Andy Bruce and William Schomberg

LONDON (Reuters) -British government bond prices soared on Wednesday after the Bank of England said it would buy long-dated bonds to bring calm to the market, although analysts had doubts about how long the respite would last.

Finance minister Kwasi Kwarteng set plans for unfunded tax cuts and more government borrowing last week, sparking a historic slide in sterling markets that sent the pound to an all-time low against the U.S. dollar, just below $1.04.

Having failed to cool a sell-off with a verbal intervention the previous day, the BoE announced an emergency move that it said would prevent the turmoil in markets from spreading through the country and seizing up credit flows.

The central bank said it would buy long-dated gilts “on whatever scale is necessary” to restore order to the market.

The BoE also said it was keeping its goal to reduce its 838 billion pounds ($892 billion) of gilt holdings by 80 billion pounds over the next year, but would postpone the start of sales – due to begin next week – because of the market conditions.

Ahead of the BoE’s announcement, strategists said the 2.1 trillion-pound gilt market was seizing up, with very poor liquidity and pricing quality being a clear sign of market dysfunction.

Thirty-year gilt yields – which move in the opposite direction to prices – finished the day more than 100 basis points lower at 3.934% after they rose to 5.092% in early trading – the highest level for 30-year yields since 2002.

It marked the biggest single day fall since at least 1992, when Refinitiv records for 30-year gilts began.

Ten-year gilt yields dropped 50 bps to 4.01%, and two-year yields fell a similar amount to 4.24%.

Against this turbulent backdrop, the United Kingdom Debt Management Office managed to sell a 30-year green gilt with a face value of 4.5 billion pounds via syndication, albeit with the highest yield since 2011.

While investors welcomed the reprieve from an outright collapse in market functioning, some doubted how durable the BoE’s intervention would prove.

“The short-term nature of the intervention … as well as the timings announced leave us with doubts that this set of measures can stabilise the gilt market over the medium term,” analysts from RBC, a primary dealer of British government bonds, said.

Capital Economics, a consultancy, said the sharp drop in gilt yields suggested the BoE’s plan was already working.

“While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position,” said Paul Dales, chief UK economist.

“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long. Either way, the downside risks to economic growth are growing,” he added.

The BoE’s first gilt purchase operation resulted in only 2.587 billion pounds of offers to sell, and the central bank accepted only 1.025 billion pounds’ worth of bids – a sign that the market had calmed down enough that holders of gilts wanted to hold on to them for now.

(Writing by Andy Bruce, editing by David Milliken and David Evans)