Crisis sees gilt yields rocket to a 20-year high
Crisis sends gold yields skyrocketing to 20-year high as Bank of England makes biggest intervention yet in markets
Government bond yields continued to rise as the Bank of England made its largest intervention in the markets to date.
Yields on 20- and 30-year government bonds — essentially the interest investors charge for loans to the government — rose to 5.2 percent and 5.1 percent, respectively, the highest since 2002.
The rising cost of borrowing came amid ongoing turmoil in the gold market, prompted by the Chancellor’s mini-budget that scared investors last month.
Borrowing costs: Yields on 20- and 30-year government bonds — essentially the interest investors charge for government loans — rose to 5.2% and 5.1%, respectively
Traders have been selling government bonds ever since, fearing that government bonds will rise, causing an “unprecedented” drop in prices and a spike in yields.
As this left a gap in pension funds heavily exposed to gilts, the Bank had to step in by promising to buy up to £5bn worth of gilts every weekday for 13 days.
As of yesterday, it had spent less than £10 billion of its £65 billion limit.
But now demand is mounting as pension funds rush to rebalance their portfolios before the bailout ends tomorrow.
Yesterday, the Bank bought £4.4bn worth of government bonds from investors, bringing the total to more than £11bn.
It intervened to rescue liability-driven investment funds (LDI) with massive amounts of gilts.
When bond prices fell, LDI funds did not have the money available to meet bankers’ demands to back their collateral.
The Bank launched its bailout to give LDI managers time to restore their balance. If it had not intervened, many funds could have seen their value depreciate to zero, causing millions of pension funds to suffer losses.