Bank of England’s (BoE) emergency bond-buying programme ends on Friday, with UK volatility in the market set to continue.
The central bank unveiled a two-week intervention in the long-dated bond market on 28 September after a number of liability driven investment (LDI) funds – held by pension plans – almost collapsed as UK prices nosedived.
Chancellor Kwasi Kwarteng’s mini budget on 23 September, which promised billions of pounds of unfunded tax cuts, sent both sterling and the bond market tumbling as market volatility was exacerbated.
Although a U-turn on the budget will reportedly be announced, potentially reversing the planned £43bn of unfunded cuts.
Analysts said there may be further central bank intervensions ahead, despite the BoE emergency programme ending today.
“It’s very probable that the Bank of England will resume repurchases because two and two doesn’t equal 22 – it is virtually impossible to wash out the massive amount of negative-yielding bonds in the pension funds’ balance sheets without serious pain, so it’s very likely that they will intervene in targeted ways and I would watch out because the next one is the ECB,” Daniel Lacalle, Tressis Gestion chief economist, commented.
The level of market uncertainty surrounding the government’s ability to deliver a suitable fiscal package at the end of October implies volatility will likely continue and force further Bank interventions, Luke Bartholomew, Abrdn senior economist, added.
Bond yields, which have an inverse relationship with prices, surged again Wednesday when the BoE’s governor Andrew Bailey said the emergency support would be withdrawn.
The 30-year gilt yield hit 5% for the first time since before the Bank’s historic intervention.