Long-term government borrowing costs have risen to their highest levels since the Bank of England launched its £65bn pension bailout, with analysts nervous that further market volatility could be on the cards.
Yields on 30-year gilts rose above 4.5% on Monday, their highest level since going over 5% just before the BoE’s intervention on September 28, while ten-year gilt yields also increased by 2.5 basis points to 4.25%.
30 year gilt yields top 4.5% for first time since aftermath of mini budget pic.twitter.com/uq8sxXaJPB
— Faisal Islam (@faisalislam) October 10, 2022
The jump in borrowing costs came as the Bank announced that it will ramp up its market intervention before it closes on Friday. It also said it will launch a scheme to provide liquidity to banks whose clients are struggling with sudden cash calls.
A new temporary repo scheme is on offer which will inject liquidity into the liability-driven investment (LDI) funds which ran into trouble when the price of long-term government bonds dropped, and the interest rate, or yield, increased.
Through their banks, the funds will be able to post their holdings of government or corporate bonds at the Bank of England for 30 days in a type of loan known as a repo which frees up cash for the LDIs and reduces the risk of them having to sell the gilts onto the market at potentially fire-sale prices.
This scheme will run until November 10, 2022.
But analysts questioned whether the intervention has adequately addressed the underlying issue.
Antoine Bouvet, senior rates strategist at ING, said: “The suspicion is that risk reduction by pension funds has been too limited so far. The question is do they have enough cash to meet new collateral requirements if the gilt market sells off again, as the gilt purchases by the Bank of England end this week.
“I think the fear is that the answer's no and that it will trigger the same snowball effect that we had two weeks ago.”
Paul Dales, chief economist at Capital Economics, commented: “If the markets weren't really ready, and there was a greater need for the banks to buy lots of long gilts from pension funds, then presumably pension funds would have sold a lot more long gilts to the Bank last week.”
“I wonder if that means that the markets are getting a bit nervy and are thinking ‘maybe the problem is a little bit bigger than we thought or longer lasting than we thought'," he concluded.