UK borrowing costs spiked once more on Wednesday, after Bank of England Governor Andrew Bailey gave pension funds three days to address their liquidity issues before the bank ends its support-giving emergency bond-buying program.
The yields on the 20- and 30-year gilts both reached their highest levels since 2002 at 5.195% and 5.1%, respectively. This was the first time above 5% since the BoE started purchasing bonds on September 28 to quell the turbulence brought on by Prime Minister Liz Truss’s tax cut proposals.
In contrast, the pound gained 1% after falling late on Tuesday as a result of Bailey’s direct speech outside the Washington summit of the International Monetary Fund.
“We’ve made it known that we’ll be gone by this week’s end. We believe that balance is necessary “said Bailey. “You still have three days, is my message to the funds involved and to all the companies administering those funds. You must complete this.”
Since the new finance minister Kwasi Kwarteng announced $49.8 billion in tax cuts on September 23 without providing any additional information regarding how they would be paid for, the British financial markets have been under pressure.
The cuts, according to Kwarteng and Truss, are necessary to restart Britain’s economy’s growth. Data that was released on Wednesday indicated that a recession was imminent.
Some pension funds have been severely impacted by the rise in borrowing costs, which prompted the BoE to start a bond-buying program. On Monday, it quadrupled the maximum daily size of this program before expanding it to include inflation-linked bonds on Tuesday.
Index-linked gilt prices increased little on Wednesday, escaping the drop affecting conventional gilt prices, which momentarily drove benchmark 10-year rates to their highest level since 2008 at 4.632%. Index-linked gilts give holders protection against inflation.
Investors are concerned that the BoE’s decision to stop buying bonds on Friday may be too soon for some pension funds.
According to three sources with knowledge of the conversations, the BoE informally told bankers that it could continue purchasing bonds after Friday’s deadline if market conditions required it.
