London
CNN Business
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The Bank of England is struggling to contain the crisis activated because the British government plans to borrow money to pay for the tax cuts, raising fears that the country’s financial markets could once again spiral out of control.
Almost 20 days after Finance Minister Kwasi Kwarteng announced much-criticized plan to kickstart the economysparking an investor revolt, the UK bond market and the pound remain under enormous pressure – despite three urgent central bank interventions.
Yields on the benchmark 10-year UK government bond rose above 4.59% on Wednesday, close to levels immediately following Kwarteng’s announcement last month. Yields on 30-year bonds also jumped above 5%. Yields rise as bond prices fall, pushing up borrowing costs for governments, mortgage holders and businesses.
The country’s central bank is in dire straits. It is trying to restore the UK government’s lost credibility in the markets, although its toolkit is not designed for this kind of endeavor.
“There is nothing they can do to address the root of the problem, which is confidence in UK assets,” said Richard McGuire, head of interest rate strategy at Rabobank.
However, after more support for the market With this week’s announcement unsettling, the Bank of England faces calls to do more to help prevent another crisis. For now, the focus is on whether it should expand its £65 billion ($72 billion) bond-buying program it announced at the end of September after its Friday end date.
Retirement It’s a hit strongly by the UK bond market two weeks ago said it may need more time to deal with its affairs and questions about the government’s plan to manage its debts – a cause main cause of disturbance – will not be answered until the end of October, when Kwarteng will release additional details about tax and spending plan.
“The only solution for the Bank of England now is to extend [bond-buying] a bit longer and to make it bigger,” said Bryn Jones, head of fixed income at Rathbone. “The market turns around and says, ‘We need you to do more. ”
The Governor of the Bank of England, Andrew Bailey, at least for now is not budging. “You now have three days left,” he told pension fund managers on Tuesday, stressing that the scheme is temporary. “You have to finish this.”
The Bank of England said it was forced to act to prevent a “self-reinforcing spiral” after markets experienced unprecedented selling as a result of budget plans unveiled by Kwarteng and Prime Minister Liz Truss.
As government bond prices fell, some pension funds were asked to raise billions of pounds in collateral. In the scramble for cash, investment managers are forced to sell whatever they can – including government bonds in some cases. That sent yields even higher, sparking another wave of mortgage funding.
Central bank announcement on September 28 that they would buy the bonds through October 14, initially pacifying the chaos. However, market conditions have started to deteriorate again in recent days as pension funds sell what they can to deposit into coffers before the program ends.
“There is a reasonable level of emergency activity in the industry at the moment,” said Steve Delo, chairman of PAN Trus Trust, which provides governance services to UK pension schemes. “Investment advisors are working feverishly.”
Constant volatility in the bond market is complicating those efforts, as rising yields once again put hedging strategies at risk.
“You’re dealing with something that has a moving target, and that’s probably the nature of the challenge,” says Delo.
So far, the Bank of England has bought 8.8 billion pounds ($9.8 billion) of bonds, far less than they could have collected.
But it was adamant that it would stick to Friday’s deadline, insisting it did not want to intervene longer than necessary.
“As the bank has made clear from the outset, their temporary and targeted purchase of gilts will end on October 14,” a spokesman said on Wednesday.
However, as bond yields continue to rise, not everyone believes that approach makes sense. The Lifetime Savings and Retirement Association said the end date was a “primary concern” for its members, who provide retirement income for 30 million people. Investors, meanwhile, have not been sold for actions taken so far.
“The BoE seems intent on showing that the measures they are taking are a financial instrument, not a form of monetary policy,” said Daniela Russell, head of UK interest rate strategy at HSBC. in a recent note to customers. “However, in doing so, we think they may prove inadequate and fall short of their goals.”
The main conundrum is Banks are caught in a web of conflicting policy goals. UK government says it wants to boost demand to stimulate growth, while central bank wants to reduce demand to reduce highs inflation – creates confusion about which target will win.
Recent policy reversals by the Truss government taking down, including the removal of tax cuts for the top earners, have also made it difficult for investors to discern which measures still work. is being applied.
McGuire of Rabobank, who described the market situation in the UK as a “slow track”.
In addition, the Bank of England plans to start selling government bonds purchased during the pandemic at the end of the month to help tackle inflation. If they buy bonds at the same time to keep the market steady, its message could turn out to be more mixed.
Russell said the situation remained “precarious”, but she thinks the Bank of England could start selling bonds as planned, as long as it focuses on shorter-term debt, which has not been heavy handling.
Such complex proposals put the Bank of England in a terrible position. Its previous interventions have been ineffective. The government is making their lives much more difficult. And inflation, as always, continues to run high.
It’s a warning to governments around the world about the costs of any mistake at a delicate time, with interest rates rising at their fastest in decades and financial markets showing signs of stress. .
“What’s happening in the UK is a ‘cautionary story,” said McGuire.
