Bank of England’s efforts to calm markets fails to stop gilts sell-off

Government borrowing costs skyrocketed again yesterday – despite the Bank of England’s efforts to calm markets.

The yield or “interest rate” on 10-year government debt, which moves in the opposite direction to the price, shot back to the 4.5 percent level where the Bank was forced to intervene last month.

The 30-year perennial gilts also crept to 4.7 percent, approaching the 5 percent level reached in the days following Kwasi Kwarteng’s mini-budget.

The moves show that investors have yet to be convinced by the chancellor’s efforts to bolster his credibility, including pushing forward his tax plan to October 31.

It had come out on November 23, two months after Kwarteng sparked a bond flight by announcing £45bn in tax cuts, but with no details on how they would be financed.

The latest turnaround in the gold market also came as the Bank ramped up its emergency relief program, which expires on Friday.

When the gold markets went into turmoil last month, the Bank pledged to buy up to £5bn of government debt every day for 13 weekdays, boosting demand.

So far, the Bank has spent only about £6bn of the £65bn it could have spent as markets stabilised. But it has now vowed to use all the £65bn it has set aside, if necessary, to avoid further turmoil if the plan expires on Friday.

Yesterday it said it would buy up to £10bn worth of gilts, but ended up spending just £853.1m.

Despite this reassurance, gold prices plummeted again.

Daniela Russell, head of UK tariffs at HSBC, described the BoE’s moves as a ‘band-aid’.

The Bank initially launched its rescue plan to help pension funds that had plowed some of their depositors’ money into so-called LDI (liability-driven investment) strategies.

Such strategies, which aim to ensure that a pension fund has enough cash to meet all of its future payouts, while being “hedged” against movements in inflation and interest rates, are highly exposed to government bonds.

As gold prices plummeted, LDI funds were forced to sell gilts to raise money for their lenders who demanded more collateral.

The Bank hoped its rescue plan would support gold prices and give LDI funds time to rebalance.

But it ends Friday and the funds are now racing against the clock to sell the required quantities of gilts.

Simon French, chief economist at Panmure Gordon, also said there was a “credibility gap” among traders facing the government as they wonder how Kwarteng will make ends meet.

The Institute for Fiscal Studies thinks the Chancellor will need to find £62bn in cuts or tax increases by 2026-27 to stabilize the national debt as a fraction of national income.

James Lynch, asset manager at Aegon Asset Management, said the next two weeks until the Office for Budget Responsibility released its review of Kwarteng’s policies would be challenging.

“Note the Halloween analogies for the gilded market,” he said.