# Analysis – Turbulent UK bond market may force BoE’s hand again
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-12
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: UK bond yields surge: BoE emergency support in limbo
Meta Description: Bank of England Governor Andrew Bailey is under pressure to maintain emergency bond support as market instability continues. Find out more.
URL: https://financedigest.com/analysis-turbulent-uk-bond-market-may-force-boes-hand-againhtml

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By Dhara Ranasinghe and Harry Robertson

LONDON (Reuters) – Bank of England Governor Andrew Bailey has been unequivocal: the central bank will end emergency support for bonds on Friday. Yet with markets showing few signs of stabilising, the BoE may have little choice but to come back with more.

Britain’s government borrowing costs jumped again on Wednesday with 20- and 30-year bond yields hitting 20-year highs after Bailey told [pension funds on Tuesday they had three days](https://www.financedigest.com/pensions-awareness-day-could-you-get-by-on-less-than-living-wage.html "Pensions Awareness Day: Could you get by on less than living wage? ") to fix liquidity problems before emergency BoE bond-buying ends.

The [central bank](https://www.financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopes.html "No Santa rally for markets as central banks dampen peak rate hopes") is caught between a rock and a hard place.

On the one hand it is navigating what it has called a [“material risk to financial stability” with the gilt market](https://www.financedigest.com/6-easy-ways-to-save-money-with-printed-marketing-materials.html "6 easy ways to save money with printed marketing materials") rout exposing vulnerabilities in the pensions sector.

But buying bonds doesn’t sit well with the BoE’s mandate to control [surging inflation](https://www.financedigest.com/boes-bailey-speaks-about-surging-inflation-and-rate-hikes.html "BoE’s Bailey speaks about surging inflation and rate hikes") and BoE officials are anxious to avoid giving the impression that they are buying bonds to support the fiscal plans of the government.

[Investors suspect the need to avoid](https://www.financedigest.com/top-ten-biggest-mistakes-by-novice-investors-and-how-to-avoid-them.html "TOP TEN BIGGEST MISTAKES BY NOVICE INVESTORS – AND HOW TO AVOID THEM") further turmoil will prevail for now and the BoE will continue to buy bonds, even if not immediately after Friday’s deadline.

Ultimately the [Bank of England](https://www.financedigest.com/bank-of-england-raises-rates-to-3-5-says-inflation-has-peaked.html "Bank of England raises rates to 3.5%, says inflation has peaked") is tasked with creating financial stability. And what they can’t allow is for the [bond market](https://www.financedigest.com/stocks-up-bond-yields-fall-as-markets-mull-a-fed-policy-pause.html "Stocks up, bond yields fall as markets mull a Fed policy pause") to be overly volatile,” said Iain Stealey, CIO of fixed income at JPMorgan Asset Management.

So, I [think they will probably stop](https://www.financedigest.com/new-uk-pm-must-be-radical-to-stop-power-bill-catastrophe-think-tank.html "New UK PM must be radical to stop power bill catastrophe – think tank") this current iteration of the support come Friday. That doesn’t mean that they won’t be back if you do [see a lot of volatility come next](https://www.financedigest.com/britains-next-sees-lower-profit-in-2023-as-consumer-outlook-darkens.html "Britain’s Next sees lower profit in 2023 as consumer outlook darkens") week.

Britain’s 30-year gilt yield is back above 5% for the first [time since](https://www.financedigest.com/soccer-arsenal-reach-womens-champions-league-semis-for-first-time-since-2013.html "Soccer-Arsenal reach Women’s Champions League semis for first time since 2013") the BoE began buying bonds on Sept. 28 to calm turmoil triggered by Prime Minister Liz Truss’s [tax cut plans](https://www.financedigest.com/uk-drops-plan-to-tax-sovereign-wealth-funds.html "UK drops plan to tax sovereign wealth funds") which raised concerns about potentially unsustainable borrowing.

It has shot up over 100 basis points (bps) so far in October, after surging 75 bps last month. U.S. and German 30-year borrowing costs are up just 16 and 33 bps respectively this month and the contrast highlights the scale of selling gripping Britain’s [bond market](https://www.financedigest.com/global-bank-bonds-claw-back-losses-as-markets-rout-eases.html "Global bank bonds claw back losses as markets rout eases").

Policymakers also have their eye on sterling, which has crawled back from recent record lows near $1.03. But the pound, which fell on Bailey’s latest comments, is down almost 20% this [year and further weakness](https://www.financedigest.com/uk-to-avoid-recession-this-year-but-outlook-still-weak-bcc-says.html "UK to avoid recession this year but outlook still weak, BCC says") would exacerbate inflation and add to pressure on the BoE to hike rates further.

[Money markets](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") are pricing in a hefty 100 bps rate hike at the BoE’s November meeting.

UK government [bond yields](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold") surge https://graphics.reuters.com/GLOBAL-THEMES/lbvgnqdxapq/chart.png

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/276.jpg)

PENSION FUND WATCH

At the heart of whether the BoE will have to step back into the market is whether the pace of [selling by pension funds](https://www.financedigest.com/intercos-fund-shareholders-l-catterton-otpp-sell-6-stake-at-7-discount.html "Intercos fund shareholders L Catterton, OTPP sell 6% stake at 7% discount") abates.

The unprecedented bond market moves triggered hefty collateral calls on [hedging strategies that many funds](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund") are still struggling to meet.

Bailey has to give the message that the BoE is ready to walk away but fundamentally there has to be a big question mark over that and whether the BoE carries on, or whether financial stability risks [continue and the BoE comes back to the market,”](https://www.financedigest.com/uk-housing-market-weakness-continues-improvement-on-the-horizon-rics.html "UK housing market weakness continues, improvement on the horizon – RICS") said Chris Scicluna, head of economic research at Daiwa Capital Markets.

The BoE this week introduced a repo facility for banks to ease pressures [facing client funds caught up in the turmoil](https://www.financedigest.com/spains-santander-reaffirms-targets-in-face-of-recent-market-turmoil.html "Spain’s Santander reaffirms targets in face of recent market turmoil"). It will run until Nov. 10.

Bond [market](https://www.financedigest.com/us-stock-futures-bonds-rally-as-markets-flirt-with-fed-pause.html "US stock futures, bonds rally as markets flirt with Fed pause") volatility has also raised doubts about whether the BoE can press ahead with its plan to sell some of its bond holdings, a process known as quantitative tightening (QT).

The BoE originally planned to start QT in early [October but pushed](https://www.financedigest.com/central-banks-ease-off-on-rate-hike-push-in-october.html "Central banks ease off on rate hike push in October") the launch back until Oct. 31 as it [launched its emergency bond-buying programme](https://www.financedigest.com/uk-to-launch-new-billion-pound-home-insulation-programme.html "UK to launch new billion-pound home insulation programme").

It would not be sensible for the bank to just plough [ahead with QT if we are seeing](https://www.financedigest.com/italys-mps-sees-safe-habour-ahead-after-strong-quarter.html "Italy’s MPS sees ‘safe habour’ ahead after strong quarter") elevated volatility. It might be the case that they delay QT further,” said Stealey at JPMorgan [Asset Management](https://www.financedigest.com/britains-post-brexit-asset-management-revamp-eyes-liquidity-tokenisation.html "Britain’s post-Brexit asset management revamp eyes liquidity, tokenisation").

Others said [sentiment was unlikely to improve](https://www.financedigest.com/european-junk-debt-sales-spring-back-to-life-as-sentiment-improves.html "European junk debt sales spring back to life as sentiment improves") until confidence in the government’s growth and fiscal plans was restored. British [finance minister](https://www.financedigest.com/scottish-finance-minister-kate-forbes-to-run-for-countrys-leadership.html "Scottish finance minister Kate Forbes to run for country’s leadership") Kwasi Kwarteng has said he will deliver those plans on Oct. 31.

The BoE should consider continuing the emergency bond-buying programme to Oct. 31 “and possibly beyond”, the Pensions and Lifetime Savings Association said on Tuesday.

For Nikesh Patel, head of client solutions at Kempen Capital Management, extending the bond-buying scheme beyond Friday may not be enough.

He said pension schemes were spinning in a “merry go-round” as they sold gilts to raise cash to put [back on hedges that will buy](https://www.financedigest.com/uks-bellway-to-buy-back-shares-hike-social-housing-output.html "UK’s Bellway to buy back shares, hike social housing output") gilts. The circular nature of it has bunged up the market, he said, with little buying or selling taking place and market liquidity poor.

The BoE has bought a total of more than 13 billion [pounds of gilts](https://www.financedigest.com/the-pound-gilts-and-stocks-likely-winners-and-losers-from-uk-budget.html "The pound, gilts and stocks: likely winners and losers from UK budget") of at least 20 years’ maturity since the operations started on Sept. 28. It [raised its daily maximum purchase total to 10 billion](https://www.financedigest.com/delivery-hero-ramps-up-interest-payments-to-raise-1-billion-euro-convertible-bond.html "Delivery Hero ramps up interest payments to raise 1 billion euro convertible bond") pounds a day on Monday.

“I don’t think extending at this point is enough. The time has passed for extending to be enough. It needs to be something with a much bigger bang,” Patel said.

($1 = 0.9045 pounds)

(Reporting by Dhara Ranasinghe, Harry Robertson, Tommy Wilkes; Editing by William Schomberg and Nick Macfie)


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