Borrowing costs dive as Bank of England soothes gilt market

Sterling skyrocketed and borrowing costs fell following the Bank of England’s blockbuster intervention to calm the feverish gold-plated markets.

The central bank said it would buy long-term bonds “on any scale” to “restore orderly market conditions” after days of turmoil following last week’s tax cut.

“If the dysfunction in this market were to continue or worsen, there would be a material risk to the UK’s financial stability,” it said, as fears of a collapse in the pension sector mounted as rising bond yields wreak havoc on financing models.

The bank, headed by Governor Andrew Bailey (pictured), put its plans to begin unwinding the £895bn quantitative easing (QE) of cash printing on hold.

It was supposed to start selling the gilts it bought through QE next week, but the first sale will be on October 31.

The move stunned financial markets and 30-year Treasury yields, which had risen above 5 percent for the first time in 20 years, fell below 4 percent, the sharpest one-day drop on record.

One-year, five-year and 10-year government bond yields also declined, pushing down borrowing costs for government, business and households, although all remain well above month- and year-ago levels.

Sterling also rallied. After the pound crashed to an all-time low of nearly $1.03 early in the week, it rose above $1.09.

Daniela Russell, head of HSBC’s UK pricing strategy, said the intervention was “a reassurance that the market was waiting for”.

She added: “The announcement to suspend its government bond selling and long-term bond buying program is a great relief.”

Markets have been in turmoil for months, with the cost of government borrowing soaring and currencies around the world falling against an unfettered dollar, amid fears that rising inflation will force central banks to raise interest rates so far that the global economy will collapse. enters a recession.

Stock markets have also been hit, although the FTSE 100 in London has outperformed many.

The magnitude and speed of the British asset sell-off led to further turmoil in global markets, with the euro and Chinese renminbi reaching new lows against the dollar.

“It’s like having a sandcastle where bits and pieces start falling off each other,” says Olivier Marciot of wealth manager Unigestion. “I think the UK is one of those pieces. It just adds to the pain, it increases the stress.”

The euro bounced back, as did the pound after the Bank intervened, as stock markets halted their decline.

In London, the FTSE 100 rose 0.3 percent while the FTSE 250 climbed 0.1 percent. Among the big winners were commercial real estate stocks, which have been under severe pressure in recent sessions over fears that rising interest rates would erode the value of office buildings, shopping centers and warehouses.

Land Securities gained 6.9 percent, British Land 5.7 percent and Segro 6 percent. But life insurance and pension companies were affected. M&G fell 6.2 percent, L&G 5.6 percent and Aviva 4.9 percent. Analysts warned of further volatility in the days and weeks ahead.