LONDON (Reuters) – Bank of England Governor Andrew Bailey has made this clear. The central bank ends emergency support for bonds on Friday. But with the market showing little signs of stabilizing, the BoE may have little choice but to provide more funding.
UK government borrowing costs jumped again on Wednesday, with yields on 20- and 30-year bonds hitting a 20-year high.
Central banks are wedged between a rock and a hard place.
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On the one hand, it is addressing what it calls “significant risks to financial stability” with the crash in the gold and silver markets exposing vulnerabilities in the pension sector.
However, the purchase of government bonds is at odds with the BoE’s mandate to curb soaring inflation, and BoE officials do not give the impression that they are buying government bonds to support the government’s fiscal plans. I want to be like you.
Investors believe the need to avoid further turmoil prevails for now and the BoE will continue to buy bonds, even if not immediately after Friday’s deadline.
“Ultimately, the Bank of England is tasked with ensuring financial stability, and we cannot allow the bond market to become too volatile,” said Ian Steeley, CIO of fixed income at JPMorgan Asset Management. said.
“So I think they will probably stop repeating the current support on Friday.
UK 30-year bond yields swelled after BoE purchases on Sept. 28 to calm turmoil that sparked concerns over potentially unsustainable borrowing caused by Prime Minister Liz Truss’ tax cut plans exceeded 5% for the first time since the launch of
After jumping 75 bps last month, October has so far surpassed 100 bps. US and German 30-year borrowing costs rose only 16 and 33 basis points respectively this month, highlighting by contrast the size of the sell-off that dominates the UK bond market.
Policy makers are also eyeing the pound’s rebound from recent record lows near $1.03. But the pound, which fell on Bailey’s latest comments, is down almost 20% this year, and further weakness will exacerbate inflation and put pressure on the BOE to raise rates further.
Financial markets are pricing in a significant rate hike of 100 bps at the BoE’s November meeting.
pension fund watch
The heart of whether the BoE needs to return to the market is whether the pace of selling by pension funds slows.
Unprecedented bond market movements have triggered heavy collateral demands for hedging strategies that many funds are still struggling to meet.
“Bailey has to send the message that the BoE is ready to exit, but basically it’s about whether the BoE will survive or whether the financial stability risks will continue and the BoE will return to the market. We need a big question mark as to whether it will come,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
The BoE this week introduced a repo facility for banks to ease the pressure facing clients’ funds caught in the turmoil. It will be held until November 10th.
Bond market volatility has also cast doubt on whether the BoE can pursue plans to sell some of its bond holdings, a process known as quantitative tightening (QT).
The BoE was originally planning to launch the QT in early October, but postponed the launch until October 31 as it launched an emergency bond buying programme.
“If we see a rise in volatility, it is not wise for banks to delay QT,” said Steeley of JPMorgan Asset Management.
Some say it is unlikely that sentiment will improve until confidence in the government’s growth and fiscal plans is restored. UK Finance Minister Kwasi Kwarten said the plans would be submitted on 31 October.
The Pensions and Life Savings Association said Tuesday that the Bank of England should consider continuing its emergency bond-buying program through Oct. 31 “if possible beyond”.read more
For Nikesh Patel, head of client solutions at Kempen Capital Management, extending the bond-buying scheme beyond Friday may not be enough.
He said the pension system was spinning on a “merry-go-round”. He said its cyclical nature has pushed the market up, with few buys and sells and little liquidity in the market.
The BoE has purchased over £13bn in gold coins with maturities of at least 20 years since it went live on 28th September.
“I don’t think extending it at the moment is enough. We’ve had enough time to extend it. We need to make it more impactful,” Patel said.
($1 = £0.9045)
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Reporting by Dara Ranasinghe, Harry Robertson and Tommy Wilkes.Edited by William Schomberg and Nick McPhee
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