A 180-degree change in the Bank of England’s ‘road map’. The monetary authority announced this morning that, on a temporary basis, it will carry out the necessary purchases of gilts (UK sovereign bonds) of long duration. In this way, the central bank is launching itself into debt purchases in the face of pressure from the financial markets following the announcement of UK Prime Minister Liz Truss’s fiscal plan.
Purchases of UK debt will be strictly limited in time, according to the BoE’s statement. Following the news, what has been the reaction from international fund managers? We leave you with comments from Janus Henderson Investors, Liontrust and credit rating agency Scope Ratings.
Bethany Payne, Global Bond Portfolio Manager at Janus Henderson Investors
The Bank of England are generously offering to buy long dated gilts starting today. That’s a complete flip on their announcement on Thursday last week where they confirmed sales of gilts would go ahead, starting Monday 3 October. The Mexican standoff between the government, on the fiscal accelerator, and the central bank on the monetary brake, was won by the government as the Bank of England has had to blink. The contagion risks of margin calls, caused by higher gilt yields, meant that a reflexive negative feedback loop into falling UK asset prices had become too high, risking a doom loop.
The central bank will be concerned over their appearance as being independence, and have therefore tried to walk a tightrope between today’s announcement of ‘limited period’ of long-dated gilt purchases before starting a delayed quantitative tightening schedule. This schedule will be at a slightly higher pace so that they still make good on their promise to reduce their balance sheet by £80bn in the first year. The likelihood of the market misunderstanding this policy change though is high and risks a potential hazardous misstep.
Today’s announcement will stem some of the tide of selling flows we were expecting this week, but the announcement is only a sticking plaster to a much wider problem. The IMF warned the UK government overnight to ‘re-evaluate’ tax cuts but did the Bank of England just give them the green light to continue with their plans? Certainly, the market would have benefitted more from the government blinking first, not the other way around.
With the Bank of England buying long-dated bonds and therefore showing willingness to restart quantitative easing when markets become jittery, this should provide some comfort to investors that there is a gilt yield backstop. Coupled with a relatively successful 30-year gilt syndication this morning (total interest was £30bn versus £4.5bn issued) there is some comfort to be had. However, raising bank rate while also engaging in quantitative easing in the short run in an extraordinary policy-quagmire to navigate. And potentially speaks to a continuation of currency weakness and continued volatility.
Donald Phillips, co-head of the Liontrust Global Fixed Income Team
Clearly there has been a vertical climb in UK government bond yields and the opposite in the value of the pound since UK Chancellor Kwasi Kwarteng’s (not so) mini budget last week. The impacts of this run were being felt acutely across financial markets. Today, the Bank of England announced a “strictly time limited” buying program to shore up the market in longer-dated bonds, designed, we assume, in particular to stop the damage being done to pensions by the violent increase in long-dated bond yields. The Bank has also announced a postponement in bond sales until the end of October, designed to help improve the balance in the UK government debt market.
This is a welcome piece of news in the short term, preventing for now a run on the gilt market. Ultimately, whilst inflation remains a problem, quantitative easing (QE), is unlikely to be anything other than a very short-term fix. Indeed, the Bank is clear that quantitative tightening (QT) will recommence at the end of October.
We hope this is buying the UK government time to address the flaws in their profligate fiscal policies, affording them some room to bring to parliament a plan based on the reality of the economy we have. Failure to address their fiscal plan, we believe, will likely lead to more pain in government bonds down the line.
The sobering issue of the UK’s finances under this government likely explains why the pound so far has not joined in with the rally seen this morning in government bond yields.
Eiko Sievert, Director, Sovereign Ratings, Scope Ratings
In light of the extreme market reaction to the UK government’s “mini-budget” outlined last week, it is no surprise that the Bank of England felt pressured to take emergency action.
The central bank’s decision to eschew an emergency rate hike and prefer temporary purchases of long-dated gilts to restore orderly market conditions makes sense as a faster and more direct way to support financial stability.
In essence, the Bank of England is acting as a temporary shock absorber for the high volume of future debt issuance required by the UK government to fund the sweeping tax cuts announced last week.
The Bank of England’s credibility depends on ensuring that the bond purchases take place for a limited time and are unwound as soon as markets have stabilised.