UK government bonds rallied on Wednesday after the Bank of England intervened to calm market turmoil, but sterling weakened as investors continued to worry about chancellor Kwasi Kwarteng’s economic plans.
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 4.13 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 debt fell to 4.12 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 key barometer for global borrowing costs, fell to 3.9 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 said.
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 fell following the BoE’s intervention on Wednesday, down 0.5 per cent to $1.068 in London trading.
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.
The central bank’s moves eased selling in equities markets. The FTSE 100 traded down 0.6 per cent, a sharp improvement from losses of 1.9 per cent earlier in the session.
The Europe-wide Stoxx 600 was also down 0.8 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.
Futures tracking the S&P 500 struggled for direction after the US benchmark touched its lowest intraday level since November 2020 on Tuesday over investor concerns about the pace of interest rate rises to combat inflation, and their effect on global economic growth.
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.