Gilts rally as Bank of England bond buying steadies market
A rally in UK government bonds gathered momentum on Thursday, as yields continued to drop following signs that the Bank of England’s bond-buying intervention is ramping up in its final days.
The 30-year gilt yield fell by 0.32 percentage points to 4.57 per cent, signalling a strong rise in prices. It had soared above 5 per cent on Wednesday, close to the level that prompted the BoE to step into markets with an offer to buy up to £65bn of long-term gilts two weeks ago.
Investors had been unnerved by confirmation from Andrew Bailey, the bank’s governor, on Tuesday that the buying programme would not be extended beyond Friday, with the BoE warning troubled pension schemes they had just three days left to sell whatever assets they needed to in order to restore their cash buffers.
However, after the central bank purchased £4.4bn of bonds on Wednesday — easily the biggest daily volume so far in the BoE’s programme — markets were reassured by signs that pension funds were taking advantage of the facility to offload gilts and raise cash.
“This last round [of BoE buying] shows that people are realising they had better use the facility quick because the window is closing,” said James Athey, a fund manager at Abrdn. “It also seems like the kind of levels we hit yesterday are a line in the sand where the bank is prepared to provide liquidity.”
Shorter-dated bonds also rallied, with the 10-year gilt yield down 0.19 percentage points at 4.23 per cent. The pound was up 0.2 per cent against the dollar at $1.113.
Despite Wednesday’s declines, 30-year bond yields remain well above the level of around 3.8 per cent seen before chancellor Kwasi Kwarteng’s £43bn package of unfunded tax cuts last month triggered acute volatility in the gilt market and sterling.
Prime minister Liz Truss faces growing pressure from her party to rewrite the “mini” Budget but she told Tory MPs on Wednesday she would stick with the tax-cutting plans and that she could balance the books without cuts to public spending.