The Bank of England (BoE) has intervened in the bond market again but with every move it makes to reassure the markets investors are left questioning just what is the extent of the financial malaise they are trying to protect, and how stretched are some of the UK’s leading pension funds.
As Neil Wilson at Markets.com said “to expand your emergency intervention in the market once is unfortunate, to do so twice looks like carelessness.”
The BoE will be disappointed that yesterday’s seemingly choreographed moves of the bank’s (first) intervention, the bringing forward of the chancellor’s fiscal statement and OBR forecasts, together with the appointment of a “safe pair of hands” at the Treasury did little to calm the markets.
In fact, the opposite happened with UK gilts slumping yesterday almost reaching levels seen on the day of the chancellor’s mini-budget.
Today’s moves haven’t had the desired impact either with the 30 year gilt yield down less than a basis point at 4.7% while the 10 year is unchanged at 4.47%.
Analysts aren’t impressed.
Nigel Green, chief executive of financial advisory group deVere Group said ““The UK faces the threat of significant, extended financial instability unless the Bank of England and the UK government work together on a long-term plan to calm markets.”
“The current last-minute, panic mode approach that’s being taken is highly damaging to the UK’s economic prospects."
Quite how it ends remains to be seen. As Wilson commented: “Markets are like toddlers – always testing the boundaries, wildly overreacting and usually working to cause maximum mayhem at the most inconvenient times.”
Support from the BoE will almost certainly have to be extended beyond this Friday’s current deadline, and probably until at least publication of the chancellor’s fiscal statement at the end of the month which the central bank (and the government) will be hoping restores some confidence in the ability of the UK to meet its financial commitments.
That is what pension funds are calling for. The industry trade body, The Pensions and Lifetime Savings Association said many pension funds want the Bank of England to extend its support beyond the cut-off date.
It said confidence in the market remained low but also urged its members to take steps now to re-balance portfolios and protect their strategies.
Buying time may be the answer but it also piles pressure on the beleaguered chancellor.
A credible plan from Kwasi Kwarteng, warmly received by the markets, would do a lot to calm worries in the bond market and could help push yields back down.
But the risk is that is that the plan doesn’t look credible and the volatility and turmoil returns to the markets once again.
In short, there is a lot hanging on this event on October 31st. With the government’s track record on fiscal credibility and calming the markets so far – what could possibly go wrong.