# Britain’s bond market turmoil 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 Government Bond Yields Hit 20-year High Amid Liquidity Problems Meta Description: Get insights into the recent turmoil in the UK's financial markets caused by BoE's emergency bond-buying, pension fund challenges, and market URL: https://financedigest.com/britains-bond-market-turmoilhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-10-12t160627z1lynxmpei9b0w6rtroptp4global-money-1736815037366-compressed.jpg) LONDON (Reuters) – British government borrowing costs hit a 20-year high on Wednesday after Bank of England Governor Andrew Bailey told pension funds they had three days to fix liquidity problems before the bank withdrew emergency bond-buying support. The country’s financial markets have been in turmoil since finance minister Kwasi Kwarteng last month unveiled tax cuts with no details of how they would be paid for. Following is a snapshot of related events, comments and explanations: WHAT’S BEHIND THE CRISIS? \\* The Bank of England has been forced into emergency bond-buying to stem a sharp sell-off in Britain’s 2.1 trillion pound ($2.3 trillion) government [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") that threatens to wreak havoc in the pension industry and increase recession risks. \\* The sell-off began after Kwarteng’s tax-cut announcement. \\* The BoE interventions have highlighted a growing segment of Britain’s pensions [sector – liability-driven investment](https://www.financedigest.com/invest-in-infrastructure-to-escape-the-starvation-cycle-warns-leading-nonprofit-sector-strategist.html "Invest In Infrastructure To Escape The ‘Starvation Cycle’, Warns Leading Nonprofit Sector Strategist"). \\* LDI helps pension funds use derivatives to “match” [assets and liabilities to avert risks](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") of shortfalls in payouts, but the soaring interest rates have triggered emergency collateral calls for those funds to cover the derivatives. [MAJOR PLAYERS](https://www.financedigest.com/north-american-market-for-veterinary-respiratory-ventilators-to-hold-lions-share-owing-to-presence-of-major-key-players-fact-mr-report.html "North American Market for Veterinary Respiratory Ventilators to Hold Lion’s Share Owing to Presence of Major Key Players: Fact.MR Report") \\* BoE governor Bailey said on Tuesday on the sidelines of an IMF [meeting](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings") in Washington that BoE support for the pension funds would end as planned on Friday. \\* A BoE spokesperson said on Wednesday it had been made “absolutely clear” to banks at senior levels that the deadline would hold, after the [Financial Times cited sources as saying](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") it might be extended. \\* Prime Minister Liz Truss said on Wednesday she would not cut public spending after her government came under pressure to [fund the tax](https://www.financedigest.com/uk-drops-plan-to-tax-sovereign-wealth-funds.html "UK drops plan to tax sovereign wealth funds") cuts. She also dismissed calls for an early election. \\* The BoE’s chief economist, Huw Pill, said credible fiscal policy was needed as the BoE tries to [rein in inflation](https://www.financedigest.com/can-the-fed-rein-in-inflation-before-a-recession.html "Can the Fed Rein in Inflation Before a Recession?"), which is near a 40-year high at 9.9%. He said a “significant” [monetary policy](https://www.financedigest.com/asian-economic-powers-warn-of-risks-from-war-monetary-policy-normalisation.html "Asian economic powers warn of risks from war, monetary policy normalisation") move was likely at the BoE’s Nov. 3 meeting. Markets are pricing in a 1 percentage point [hike interest rates](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk") to 3.25%. \\* The pensions regulator said employers could have been called on to bail out [pension schemes](https://www.financedigest.com/how-britains-pension-scheme-hedge-became-a-trillion-pound-gamble.html "How Britain’s pension scheme hedge became a trillion pound gamble") had the BoE not intervened. MARKET REACTION \\* The 20- and 30-year UK government bond yields both hit their highest since 2002 at 5.195% and 5.1% respectively, passing 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 the turmoil. \\* Sterling, which had dived against the dollar after Kwarteng’s [tax cut](https://www.financedigest.com/uks-sunak-under-fire-over-cost-of-living-defends-his-tax-cut-plans.html "UK’s Sunak, under fire over cost of living, defends his tax cut plans") announcement, dipped to a two-week low after Bailey’s remarks, before rising by 1% on Wednesday. \\* Craig Inches, head of rates and cash at Royal London Asset Management, said: “To a global investor the UK looks a mess and therefore global [investors don’t want to step in and buy yields at attractive](https://www.financedigest.com/5-ways-that-start-ups-can-attract-investors.html "5 Ways That Start-Ups Can Attract Investors") levels until the UK gets its house in order. (Compiled by John Stonestreet and Catherine Evans; Editing by Alex Richardson and Alexander Smith) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---