LONDON: The Bank of England (BoE) has stepped up its support for the United Kingdom bond market rattled by the government’s unfunded tax cuts, aiming to prevent a rout in a US$1 trillion (RM4.7 trillion) part used by the pensions industry from spreading.
The UK central bank’s move is designed to bring an orderly finish to emergency purchases at the end of the week and to provide longer-term support for a wider range of securities in the coming weeks.
It also puts pressure on Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng to shore up confidence among UK investors after a budget-statement last month led to a plunge in the value of sterling-denominated assets.
The BoE’s programme may give a boost to corporate credit, which has seen demand plummet along with UK government bonds.
“The measure itself will be positive near term,” said Bob Stoutjesdijk, a fund manager at Robeco Institutional Asset Management.
UK bonds were initially steady after the announcement, before edging lower.
The 30-year yield was six basis points higher at 4.45% at 8.55 am London. It surged past 5% for the first time since 2002 after investors took fright at the prospect of higher supply and higher interest rates following the new government’s mini budget last month.
The measures stem from the BoE’s concerns that pension funds following so-called liability-driven investment strategies, or LDIs, were under pressure to liquidate £50bil (RM256.8bil) of long-term bonds in the last week of September, four times the usual daily average.
Together, the measures are aimed at ensuring that the LDI funds that need to unwind positions have the liquidity in the market to act by the end of this week.
They also provide a broader assurance that the BoE stands ready to keep the market working even as investors make a dramatic shift in their valuation of a wide range of UK assets.
So far, investors haven’t taken up as much of the support as the BoE has offered. In the eight auctions to date, the BoE bought just £4.6bil (RM23.6bil) of bonds, about 12% of the £40bil (RM205.5bil) capacity of the programme.
The move also raises questions whether the BoE will be able to move ahead with separate plans to start selling off some of the assets it built up over the past decade under the quantitative easing programme.
Those moves so far have been delayed until the end of October. But it’s not certain how the BoE can both support the LDI market through emergency purchases while also selling bonds in regular auctions.
“To keep the long-end gilts more or less in check, they will probably have to let go this idea of actively selling of gilts,” said Stoutjesdijk from Robeco.
The measures set out yesterday broaden the emergency programme the BoE announced on Sept 28 to prevent difficulties in LDI funds from infecting the entire financial system.
In a letter to the chairman of the Treasury committee last week, BoE deputy governor Jon Cunliffe said the the institution had no choice but to intervene to prevent fund managers dumping £50bil (RM256.8bil) of gilts and triggering a market crash.
“Clearly, the BoE is trying to find more targeted ways to support LDI funds’ liquidity,” said Antoine Bouvet, senior rates strategist at ING Groep NV. The BoE said it will continue to work with authorities and regulators to “ensure that the LDI industry operates on a more resilient basis in future.” — Bloomberg
