: Gilt yields plunge after Bank of England steps in to buy at ‘whatever scale is necessary’

Earlier on Wednesday the yield had risen to 4.6%, up more than 120 basis points in just four trading days as investors dumped government bonds in response to what they deemed a dangerously profligate budget by new Chancellor Kwasi Kwarteng.

Kwarteng’s proposal for £45 billion of debt-funded tax cuts at a time when inflation was running at a near 40-year high of 9.9% was lambasted by the International Monetary Fund.

“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture,” the IMF said. “It is important that fiscal policy does not work at cross purposes to monetary policy.”

After additional selling on Wednesday, which took the 30-year gilt yield
TMBMKGB-30Y,
4.022%
above 5% for the first time in decades, the Bank of England stepped in to calm the markets.

“The Bank is monitoring developments in financial markets very closely in light of the significant repricing of U.K. and global financial assets,” said the BoE in a statement.

“This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt….In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses,” it added.

Reports emerged on Wednesday that recent sharp declines in gilts and the pound had left some U.K. pension funds facing margin calls of as much as £100 million ($107 million) each. Also, a number of U.K. banks had suspended mortgage offers after the bond market volatility left them struggling to price home loans.

The BoE said it would buy long-dated U.K government bonds to restore order and “the purchases will be carried out on whatever scale is necessary to effect this outcome.” It was suspending its planned gilt sales under its quantitative tightening program.

“The decision to intervene in the gilt market reveals that the BoE does not intend to increase Bank Rate all the way to the 6% level currently priced-in by markets,” said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.

 “Short rates at that level would imply that many households and businesses simply would not be able to keep up their monthly loan repayments, and pension funds could not meet their obligations, threatening financial stability,” he added.

The Treasury said it “fully indemnified” the BoE’s move and stressed that though the Chancellor of the Exchequer “is committed to the Bank of England’s independence…The Government will continue to work closely with the Bank in support of its financial stability and inflation objectives”.

Krishna Guha, strategist at Evercore ISI said the BoE’s decision to postpone QT before it started and launch a fresh QE program “is remarkable, necessary and deeply worrying”.

“Remarkable because it lays bare the seriousness of the financial stability risks emerging with the uncontrolled bond market backlash against reckless UK fiscal plans. Necessary because it is the responsibility of the central bank to ensure market functioning in the core systemically important government debt market, and is proving to be effective in early trading,” he said.

“Deeply worrying because it leaves prior QT plans in disarray, has an uncertain exit, and will raise further concerns about the independence of the central bank in the exercise of its monetary responsibilities,” Guha added.

The pound
GBPUSD,
-0.59%
initially bounced but then turned tail to trade down 1.4% at $1.0581. “We expect sterling to take the brunt of any further deterioration in overseas’ investors willingness to lend to the U.K.; the MPC reluctantly will let it slide,” said Pantheon’s Tombs.

U.K. stocks
UKX,
-0.49%
rallied on the news but remained down on the day. U.S. stock futures
ES00,
+0.29%
also moved off their lowest level of the session.