Bank of England says £65bn gold intervention halted UK financial ‘spiral’

The Bank of England defended the UK government’s intervention in the bond market last week, saying it stepped in to prevent a dump sale of £50bn of gold coins that would push the UK to the brink of a financial crisis.

The central bank said on Thursday that pension funds would have been forced to sell £50bn worth of long-term UK government bonds had they not launched an emergency bond-buying program following Prime Minister Kwasi Kwarten’s ‘mini’ budget plan. rice field. short time ”. This is well above his average daily trading volume of £12 billion.

The BoE’s defense of a scheme it said would buy up to £65bn of pure gold in 13 days is the clearest example of how the UK came close to market collapse following Kwarteng’s £45bn unfunded scheme. is a sign. Tax cut.

Without central bank intervention, they feared a “self-reinforcing spiral” that threatened “severe disruption of core funding markets and consequent widespread financial instability,” said the BoE’s finance ministry. Sir John Cunliffe, Vice Governor for Stability said: Letter to the Chairman of the Finance Committee of Congress.

The letter also detailed warnings received by the BoE prior to the intervention. Managers of debt-driven investment strategies at the heart of the crisis in the UK pension fund industry will be forced to dump large amounts of government debt on Friday 23 Sept due to sharp fluctuations in gold yields, Cunliffe said. He warned that he would not get it.

While the warning lasted through the day and into Monday evening, Tuesday morning’s decline in 30-year gold coin yields offered hope for a “more orderly liquidation of long-term gold coins by LDI fund managers,” Cunliffe said. the letter said.

However, once the sale resumes, many LDI investors warn that their funds are likely to end up with negative net asset values, and the leverage on interest rates they use to manage long-term value volatility. I was forced to end my bet on . Liabilities to pensioners. As a result, the banks that lent the money would have sold the gold coins used to back these bets, causing a downward spiral in gold coin prices.

Long-term borrowing costs, which rose for the first time in 20 years, plummeted after the BoE announced its intervention. The overall move in the 30-year Treasury yield was 1.27 points on Sept. 28, larger than the bond’s annual trading range in all but four of the past 27 years, according to the letter.

The BoE has spent just £3.7bn in the first six days of the programme, well below its potential £30bn maximum. Investors and traders in the gold leaf market said the potential for larger central bank purchases had succeeded in supporting the market and giving other buyers the confidence to intervene.

However, yields started rising again this week as the BoE did not buy any bonds on Tuesday and Wednesday. Thursday morning’s 30-year borrowing costs traded at his 4.37%, up from a low of 3.64% after BoE intervention but a 20-year high above 5% when central banks were forced to act is below .

Cunliffe also responded to concerns that the gold coin-buying intervention, scheduled to end on 14 October, would undermine the BoE’s fight to bring inflation under control by effectively easing monetary policy. These operations were not intended to create permanent central bank money, nor were they designed to limit or control long-term interest rates,” he wrote.

Alongside last week’s purchases of gold coins, the central bank also delayed the start of selling gold coins from its portfolio in a bid to shrink its balance sheet. Cunliffe reiterated that this so-called “quantitative tightening” he plans to start on October 31.