UK government bonds rebound after Bank of England ‘reinsurance’

UK government bonds rallied on Wednesday after the Bank of England intervened to calm market turmoil, but the pound weakened as investors continued to fret over Chancellor Kwasi’s economic plans Kwarteng.

The central bank announced on Wednesday that it would buy long-term gilts in light of the recent “significant revaluation” of British public debt. “If the dysfunction of this market continues or worsens, there would be a significant risk to the financial stability of the United Kingdom,” the BoE said.

Yields on 30-year gilts, which earlier on Wednesday hit a 20-year high of more than 5%, fell to 4.13%. Long-term debt was on track to post the biggest decline in yields ever, according to data from Tradeweb.

Yields on 10-year debt fell to 4.12% from 4.59%. Yields fall as investors buy the bonds, driving up prices. US public debt also recovered following the BoE’s statement. The 10-year US Treasury yield, a key barometer of global borrowing costs, fell to 3.9% when investors bought the notes, after pushing the yield above 4% for the first time since 2010.

Daniela Russell, head of UK rates strategy at HSBC, said the BoE’s decision was the “reassurance the market has been waiting for”.

“The announcement to suspend its program of selling gilts and buying long-term bonds is a big relief for the market and we are seeing this with yields falling and the curve flattening,” he said. she declared.

Britain’s pound and government debt have sold off sharply since Kwarteng announced its £45bn plan of unfunded tax cuts on Friday last week. The pound fell following BoE intervention on Wednesday, falling 0.5% to $1.068 in London.

Adam Cole, head of FX strategy at RBC Capital Markets, said the BoE’s moves were seen as “something to address specific issues in the short-term gilt market.”

“The underlying issues that drove the pound down – widening deficits and the apparent dominance of ideology over economics in fiscal policy – ​​have not changed,” he added.

The central bank’s measures facilitated the selling on the stock markets. The FTSE 100 traded down 0.6%, a marked improvement from losses of 1.9% earlier in the session.

The Europe-wide Stoxx 600 was also down 0.8%, having retreated after losses of 1.8%.

The BoE said bond buying would begin on Wednesday and pushed back the start of its plan to reduce its balance sheet by a month by selling gilts from its portfolio, which was due to begin next week.

Futures following the S&P 500 struggled to find direction after the U.S. benchmark hit its lowest intraday level since November 2020 on Tuesday amid investor concerns over the pace of interest rate hikes. interest in fighting inflation and their effect on global economic growth.

Asian stock markets fell on Wednesday, with Hong Kong’s benchmark Hang Seng index falling 3.4%. The Chinese CSI 300 fell 1.6% and the Japanese Topix 1%.

Comments are closed.