UK government bonds rallied in their best day on record on Wednesday, and sterling gained ground, after the Bank of England intervened to calm turmoil in the gilt market.
The central bank on Wednesday announced it would buy long-dated gilts in light of the recent “significant repricing” of UK government debt. “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the BoE said.
Thirty-year gilt yields, which earlier on Wednesday touched a 20-year high of more than 5 per cent, fell to 3.94 per cent. The long-dated debt was on track to post the sharpest drop in yields for any single day on record, according to Tradeweb data.
Yields on 10-year UK debt fell to 4.01 per cent from 4.59 per cent. Yields fall as investors buy the bonds, boosting prices. US government debt also rallied following the BoE’s statement. The 10-year US Treasury yield, a barometer for global borrowing costs, fell to 3.76 per cent as investors bought the notes, having earlier pushed the yield higher than 4 per cent for the first time since 2010.
Daniela Russell, head of UK rates strategy at HSBC, said the BoE move was the “reassurance the market was waiting for”.
“The announcement to suspend its programme to sell gilts and buy long-dated bonds is a big relief for the market and we are seeing that with the fall in yields and flattening of the curve,” she added.
The pound and UK government debt have sold off sharply since Kwarteng announced his plan for £45bn worth of unfunded tax cuts on Friday last week.
Sterling gained 1.3 per cent to $1.087 following the BoE’s intervention on Wednesday afternoon, but analysts warned that the relief would probably be shortlived.
Adam Cole, head of FX strategy at RBC Capital Markets, said the BoE’s measures were being viewed as “something to address specific issues in the gilt market in the short term”.
“The underlying issues that have driven the pound down — the worsening deficits and apparent dominance of ideology over economics in fiscal policy — have not changed,” he added.
Equities rebounded following the central bank’s move. The FTSE 100 posted modest gains around 0.3 per cent after being down 1.9 per cent earlier in the session.
The Europe-wide Stoxx 600 gained 0.3 per cent, having pulled back from losses of 1.8 per cent.
The BoE said the bond buying would begin on Wednesday, and pushed back by a month the start of its plan to reduce its balance sheet by selling gilts in its portfolio, which was due to begin next week.
The S&P 500 ticked up 1.4 per cent, rebounding from losses on Tuesday when the US benchmark touched its lowest intraday level since November 2020 over investor concerns about the pace of interest rate rises to combat inflation, and their effect on global economic growth. The tech-heavy Nasdaq Composite rose 1.3 per cent.
Asian stock markets dropped on Wednesday, with Hong Kong’s benchmark Hang Seng index down 3.4 per cent. China’s CSI 300 fell 1.6 per cent and Japan’s Topix was down 1 per cent.
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