Borrowing costs

UK borrowing costs hit 20-year high as BoE hits bond deadline

  • UK 20- and 30-year yields hit 20-year high above 5%
  • BoE’s Bailey says there is no extension of bond-buying support
  • BoE rejects report that it informed banks of possible extension
  • The government says it has no plan to cut spending or raise taxes
  • Data suggests UK economy heading into recession

LONDON, Oct 12 (Reuters) – British government borrowing costs rose again on Wednesday after Bank of England Governor Andrew Bailey told pension funds they had three days to resolve liquidity issues before the bank ended the emergency bond buying that provided support.

Yields on 20- and 30-year gilts both hit their highest since 2002 at 5.195% and 5.1% respectively, above 5% for the first time since the BoE began buying bonds on September 28 to appease the unrest sparked by Prime Minister Liz Truss’ tax cut. plans.

However, the pound strengthened 1%, recovering from a sustained fall late Tuesday after Bailey delivered his stark message on the sidelines of the International Monetary Fund meeting in Washington.

“We announced that we will be out by the end of this week. We think the rebalancing needs to be done,” Bailey said. “My message to the funds involved and all companies involved in managing these funds: You have three days left now. You have to do this.”

Britain’s financial markets have been under pressure since new finance minister Kwasi Kwarteng announced 45 billion pounds ($49.8 billion) in tax cuts on September 23 without any details on how to pay them.

Kwarteng and Truss say the cuts are needed to kickstart growth in the UK economy. Data released Wednesday suggested it was headed for recession.

Truss told parliament on Wednesday that she had no plans to cut public spending to fund the tax cuts and deputy finance minister Chris Philp said the government would not cancel the tax plans, except for an income tax measure costing £2billion a year.

Soaring borrowing costs hammered some pension funds, prompting the BoE to launch the bond-buying program, the maximum daily size of which it doubled on Monday before expanding to inflation-linked bonds on Tuesday. .

Prices for pegged gilts, which offer holders inflation protection, rose slightly on Wednesday, avoiding a fall in conventional gilts, which briefly pushed benchmark 10-year yields to their highest since 2008 at 4.632%.

Gilt yields determine borrowing costs for households and businesses as well as the government.

Investors fear Friday’s halt to bond buying by the BoE will come too soon for some pension funds.

“Bailey needs to get the message across that the BoE is ready to go, but fundamentally there needs to be a big question mark about that and whether the BoE continues, or whether the risks to financial stability persist and the BoE is coming back into the market,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

People cross Waterloo Bridge during the evening rush hour with skyscrapers of the City of London’s financial district seen behind in London, Britain October 10, 2022. REUTERS/Toby Melville

The Financial Times reported that the BoE had privately suggested to bankers that it could continue buying bonds beyond Friday’s deadline if market conditions dictated, citing three sources briefed on the talks.

But a BoE spokesman said it had been “absolutely clear in contact with banks at senior levels” that Friday’s deadline would hold.

Kwarteng said the decision to end the support – which is guaranteed by the Department of Finance – was one for Bailey.

“MATERIAL RISK”

The central bank said on Tuesday that the situation presented a “significant risk” to financial stability.

On Wednesday, he said he was “watching closely” liability-driven investment (LDI) funds, which are critical to pension funds, ahead of Friday’s deadline.

Bailey and other BoE officials point out that their bond buying — at a time when they were supposed to sell government bonds to end their huge economic stimulus — is temporary.

BoE Chief Economist Huw Pill stressed the need for the government to pursue credible fiscal policy that does not undermine the BoE’s attempts to contain inflation, which is near a 40-year high. at 9.9%.

A “significant” move in monetary policy would likely be needed on November 3, after the BoE’s next rate meeting, Pill added. Markets fully price a 1 percentage point increase to 3.25% and see rates at 5.75% by May 2023.

The BoE wanted to make sure it was not seen as bailing out the government by offering more permanent support, said Luke Bartholomew, senior economist at abrdn.

“While the Bank certainly needs to reaffirm its independence and the primacy of its price stability mandate, it is far from clear how credible such statements are given the degree of vulnerability exposed in the gilt market. “, did he declare.

($1 = 0.9035 pounds)

Additional reporting by Dhara Ranasinghe, Tommy Wilkes and Andy Bruce Editing by John Stonestreet and Catherine Evans

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