Gilts sell off as Bank of England reiterates plan to end bond-buying scheme

A sell-off in UK government bonds accelerated on Wednesday, sending long-term borrowing costs higher after the Bank of England reiterated its plans to halt its emergency gilt-buying scheme as scheduled on Friday.

The central bank said on Wednesday morning that it “has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October”.

The BoE added that it had “made absolutely clear in contact with the banks at senior levels” that it would end its scheme this week. The Financial Times reported earlier on Wednesday that BoE officials had briefed lenders in private that it was prepared to extend the programme beyond Friday’s deadline if market volatility flares up again.

The UK 30-year yield rose 0.2 percentage points to 5 per cent, as selling gathered pace after the BoE’s announcement. Long-term yields are now closing in on levels that prompted the central bank to launch its initial intervention in the gilt market on September 28. Bond yields rise as their prices fall.

The latest bout of selling comes after BoE governor Andrew Bailey warned pension funds late on Tuesday that they had “three days left” before support ended.

“The lack of certainty is creating real challenges [for trustees],” said Andrew Coles, chief executive of Isio, a pension advisory firm. “On the one hand we have an official line which is the deadline is Friday, then stories leak through that if the markets react we might step in. This does not give certainty for trustees and schemes trying to prepare.”

The bank’s chief economist Huw Pill followed up Bailey’s message on Wednesday by insisting that the BoE should remain focused on its principal goal of fighting inflation.

“Were monetary policy to be reoriented towards serving financial stability ends . . . it would also be distracted from its central task of maintaining price stability and returning inflation to the 2 per cent target,” Pill said in a speech in Scotland. He signalled the BoE is likely to make a big increase to interest rates next month in response to chancellor Kwasi Kwarteng’s package of unfunded tax cuts in September.

The pound steadied on Wednesday, having dropped sharply after Bailey spoke in Washington on Tuesday evening. Sterling was 0.8 per cent higher against the dollar at $1.105 in London morning trading.

The BoE has been rushing to contain the fallout from Kwarteng’s tax cut package, which sent sterling and the gilt market into a tailspin, triggering a liquidity crisis among pension funds.

The central bank staged two further emergency interventions earlier this week, increasing the maximum size of its purchases and widening them to include inflation-linked bonds. With three days of buying left before Friday, the central bank has purchased £8.8bn of bonds, far below the potential size of the £65bn programme.

“Everybody appears to be building the boat while they are sailing it,” said Richard McGuire, a fixed-income strategist at Rabobank.

He added that the lack of clarity over the BoE’s intentions had compounded the information vacuum over how the government planned to get borrowing on a sustainable footing.

McGuire said: “All this uncertainty and U-turns are bad from a market perspective. The BoE is desperately attempting to obscure the symptoms of the problem because it can’t address the root cause: a credibility problem after the government’s “mini” Budget.”

Kwarteng will publish a medium-term plan on how to cut debt on October 31 but prime minister Liz Truss said in parliament on Wednesday that the government would not reduce expenditure — leaving open the question of how it plans to finance the £43bn in tax cuts.

“What we will make sure is that over the medium term the debt is falling,” Truss said. “But we will do that not by cutting public spending but by making sure we spend public money well.”

Speaking to the BBC, Jacob Rees-Mogg, the UK’s business secretary, suggested the blame for the market turmoil lay with the BoE rather than the government.

“What has caused the effect in pension funds, because of some quite high risk but low probability investment strategies, is not necessarily the mini budget,” the minister said. “It could just as easily be the fact that the day before the Bank of England did not raise interest rates as much as the Federal Reserve did.”

The Bank of England increased rates by 0.5 per cent to 2.25 per cent on September 22, a day after the Fed put in place a third consecutive 0.75 per cent rise in the US.

Additional reporting by Josephine Cumbo