The volatile bond market in the UK may once more force the Bank of England’s hand

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Last Updated on October 13, 2022 by Bitfinsider

Andrew Bailey, the governor of the Bank of England, has been very clear about the fact that the central bank will end its emergency support for bonds on Friday. However, because the markets are not displaying any signs of improvement, the BoE may have little choice but to come back with additional stimulus.

After telling pension funds on Tuesday that they had three days to fix liquidity problems before the emergency BoE bond-buying ends, Bailey told bond markets on Wednesday that 20- and 30-year bond yields had hit 20-year highs, which led to an increase in the cost of borrowing money for the British government.

The central bank is in a difficult position because it is stuck between a rock and a hard place.

On the one hand, it is navigating what it has called a “material risk to financial stability,” as the rout in the gilt market has exposed vulnerabilities in the pensions sector. On the other hand, it is navigating what it has called a “material risk to financial stability.”

The purchasing of bonds, on the other hand, is incompatible with the Bank of England’s mandate to rein in soaring inflation, and officials at the BoE are eager to avoid giving the impression that they are purchasing bonds in order to support the fiscal plans of the government.

Investors are under the impression that the need to avoid further unrest will win out for the time being, and that the BoE will continue to buy bonds, even if not immediately after the deadline on Friday.

“The ultimate responsibility for maintaining financial equilibrium lies with the Bank of England. They also can’t tolerate the bond market being overly volatile in any way, shape, or form “Iain Stealey, chief investment officer of fixed income at JPMorgan Asset Management, made this statement.

“Therefore, I believe that they will most likely terminate this particular iteration of the support on Friday. If there is a lot of volatility in the market during the coming week, this does not rule out the possibility that they will return.”

The yield on Britain’s 30-year gilt has risen above 5% for the first time since the Bank of England started purchasing bonds on September 28. This was done to calm the turmoil that was caused by Prime Minister Liz Truss’s plans to cut taxes, which raised concerns about potentially unsustainable borrowing.

After a surge of 75 basis points (bps) in the previous month, it has already skyrocketed more than 100 bps so far in October. This month, 30-year borrowing costs in the United States and Germany have increased by only 16 and 33 basis points, respectively; the contrast highlights the magnitude of selling that has gripped Britain’s bond market.

The policymakers are also keeping an eye on the pound sterling, which has rebounded from recent record lows near $1.03 and is currently in their sights. But the pound, which fell as a result of Bailey’s most recent comments, is down almost 20% so far this year, and further weakness would exacerbate inflation and add to the pressure on the BoE to hike rates even further.

The money markets are pricing in a sizeable rate hike of 100 basis points (bps) at the upcoming meeting of the BoE in November.

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