Bank of England again intervenes in bond markets, warns of ‘material risks’ to UK financial stability

The Bank of England raised interest rates by 0.5 percentage point on Thursday.

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LONDON – IN Bank of England On Tuesday, it announced an expansion of its emergency bond purchase as it looks to restore order to the country’s chaotic bond market.

The central bank said it will expand its purchases of British government bonds – known as government bonds – to include government bonds linked to the index from October 11 through October 14. Retail Price Index.

The move marks the second expansion of the bank’s extraordinary bailout package in several days after that Maximum daily gold purchases increased On the Monday before the end of the planned purchase scheme on Friday.

The bank launched an emergency intervention on September 28 after an unprecedented sell-off in long-term UK government bonds threatened The collapse of multiple liability-driven investment funds (LDI)It is widely owned by the UK Pension Systems.

“The start of this week has seen another significant re-pricing of UK government debt, particularly index-linked securities. Dysfunctions in this market and the potential for reinforcing ‘quick selling’ dynamics pose a material risk to the UK’s financial stability,” the bank said in a statement on Tuesday.

UK 10-year Treasury yields rose 64 basis points on Monday, which is a massive 5.5% price drop. Meanwhile, the price of gold linked to the 30-year benchmark is down 16% on the day, with yields now around 1.5%, down from -1.5% just six months ago. Yields move inversely to prices.

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Movements of this magnitude are highly unusual in the sovereign bond markets in the developed world.

“These additional operations will serve as an additional pillar to restore orderly market conditions through temporary absorption of sell-offs of index-linked securities that are in excess of the market’s ability to mediate,” the bank said on Tuesday.

“As with traditional gilt purchases, additional gilt purchases linked to the index will be time-limited and fully offset by the UK Treasury.”

On Monday, the Bank of England set the upper limit on its daily gold purchases at 10 billion pounds ($11 billion), of which up to 5 billion pounds will be allocated to conventional gold and 5 billion pounds to index-linked gold.

The bank said the volume of auctions will remain under review, and all purchases will be canceled in a smooth and orderly manner once the risks to market performance are judged.

The reaction in UK bond markets was muted after the announcement. The 10-year Treasury yield fell to 4.426% while the 30-year yield was nearly flat at 4.713%.

The government must establish credibility

Des Lawrence, chief investment analyst at State Street Global Advisors, told CNBC on Tuesday that the BoE’s ability to stabilize the market on its own is limited.

The wild moves in bond markets were prompted by Finance Minister Kwasi Koarting’s controversial fiscal policy announcements on September 23, which contained large swaths of debt-financed tax cuts as part of the new government’s goal to drive economic growth to 2.5%.

“The UK government is in a good position with respect to its net debt to GDP – around 80%. That is a very decent position. What they have to do is make investors credible beyond their economic forecasts, and to be fair, this is something that is outside their purview,” Lawrence said. Bank of England”.

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Combined with concerns about financial credibility, which prompted Moody’s and other credit rating agencies to revise their outlook for UK sovereign debt, Lawrence suggested that the relationship between long-term US Treasury yields and UK bonds also limits the BoE’s reach.

Kwarteng announced on Monday that his expansion detailed in the policy statement that panic markets will now take place on October 31, three weeks earlier than originally scheduled. The government has already had to change some components of its strategy.

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Also on October 31, the Bank of England plans to start its delayed gold sale as part of a broader quantitative tightening effort and unwinding of pandemic-era monetary stimulus. The Monetary Policy Committee will not meet again until November 3, after the scheduled resumption of gilded sales.

Many strategists have attributed the continued volatility in the bond markets, despite the bank’s efforts, to the limited time scale of its intervention and the possibility of gold sales starting again.

Krishna Guha, Vice Chairman of Krishna Guha, Inc., Vice President of Evercore ISI said in a research note Monday night.

“We continue to believe that it is likely that the BoE will have to reschedule or reconfigure the QT program that it has promised to resume.”

Guha said the main risk now is that the expanded Kwarteng balance sheet falls short and triggers a new wave of selling pressure in UK bonds.

“Whether the government succeeds or fails to enhance financial credibility will determine the trade-offs facing the bank,” he said.

“If it fails, the market price curve will rise further, and the bank will face an almost impossible trade-off between validating these expectations and crushing the economy and housing market, or trying to deliver less than the market expects, sterling crashing and risking inflation expectations.”

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