• The Bank of England steps in to buy long-dated bonds
  • 30-year yields fall by 100 bps after BoE support
  • BoE 14 Oct. will buy up to 5 billion pounds of gilt per day
  • The gilt sale, which starts next week, has been postponed
  • The BoE still aims to reduce QE holdings by 80 bln stg

LONDON, Sept 28 (Reuters) – The Bank of England hit Britain’s bond market, pledging to buy about 65 billion pounds ($69 billion) of long-term gilts to stem a market slump, prompting the biggest selloff since the new government’s tax cut plans. – Closed in decades.

Citing potential risks to the stability of the financial system, the BoE on Wednesday delayed the start of a program to sell its 838 billion pound ($891 billion) government bond holdings, which was due to start next week.

“If these market dysfunctions continue or worsen, there will be a material risk to the UK’s financial stability,” the BoE said. “This would lead to an involuntary tightening of financing conditions and a reduction in credit to the real economy.”

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The central bank said it remains committed to reducing its holdings of bonds bought during the 2007-08 global financial crisis and during the Covid-19 pandemic by 80 billion pounds over the next 12 months.

British 30-year bond yields hit their highest level since 2002 on Wednesday and traders said the bonds were becoming harder to buy and sell because no one wanted the risk of holding such a volatile asset.

Pension schemes that run liability-driven investment (LDI) funds to meet regulatory requirements are selling long-dated gilts to meet emergency collateral calls or reduce exposure, pension advisers said.

“Currently the schemes are running out of cash,” said one pensions adviser before the BoE intervention.

“This was a response to a specific issue with LDIs and their relationship with pension funds,” said a source familiar with the BoE’s decision.

Left unchecked, a collapse in gilt prices could lead to a vicious cycle of property fire sales, further depressing prices and creating more forced sellers.

After the BoE’s announcement, long-dated bond prices rose as the 30-year yield fell by more than a full-percentage point, their biggest one-day drop since the 1992 refinitiv record.

The central bank has put no limit on the size of its intervention but initially plans to hold daily auctions between Wednesday and October 14 to buy 5 billion pounds of gilts with maturities of at least 20 years.

“The purpose of this purchase will be to restore orderly market conditions,” it said.

The BoE bought 1.025 billion pounds of gilts out of the 2.587 billion pounds offered in its first buy-back on Wednesday, rejecting offers it deemed too expensive.

From the BoE’s point of view, the low number of offers will be viewed positively, suggesting that its commitment to buy long-dated gilts is acting as a back-stop and easing liquidity pressures, rather than making big purchases itself.

A temporary intervention?

The BoE last intervened in the gilt market to stem market turmoil in March 2020, when its latent quantitative easing program was expanded by hundreds of billions of pounds, when the market was battered by the pandemic.

In contrast, the BoE said on Wednesday that the intervention would be strictly temporary and “wind down in a smooth and orderly fashion once risks to market operations are deemed to have subsided”.

Markets have been jolted by new finance minister Kwasi Kwarteng’s unfunded tax cuts that formed part of his first economic statement on Friday.

“(The BoE) has put something under the market in the short term. However, pro-cyclical fiscal policy remains and so the relief will not last long,” said Charles Dibel, head of fixed-income policy. At Mediolanum Asset Management.

The BoE’s intervention pushed long-dated bond yields lower late Friday – after an initial negative reaction to Kvarteng’s statement – but shorter-dated yields were still higher.

Speaking on Tuesday, BoE Chief Economist Huw Pill said the BoE would only delay the planned sale of bonds if it saw market dysfunction and would not stop an orderly market revaluation of debt.

Rather than a broader effort to rein in yields, the BoE made its intervention on Wednesday aimed at tackling a specific financial stability problem.

Economists and investors said the central bank would be keen to avoid the perception that it was stepping in to finance the government or that market turmoil threatened its ability to take steps to return inflation to the 2% target.

“This policy shift is highly likely to be misunderstood by the market and poses a potentially dangerous misstep,” said Bethany Payne, global bond portfolio manager at Janus Henderson Investors.

($1 = 0.9361 pounds)

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Reporting by David Milliken, additional reporting by Carolyn Cohn, Sachin Ravikumar and Dhara Ranasinghe; Editing by Kathryn Evans, William Schomberg, Toby Chopra and Jonathan Otis

Our Standards: The Thomson Reuters Trust Principles.

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