Bonds slide again as investors say Truss U-turn did not go far enough

A chaotic gilt sell-off reignited on Friday as investors warned that Liz Truss’s attempt to reassure markets by scrapping an £18 billion (€20.5 billion) corporate tax cut was not enough to place the UK back on a sustainable fiscal trajectory.

Investors said the latest U-turn, in which the prime minister sacked chancellor Kwasi Kwarteng and ditched a centrepiece of last month’s mini-budget, will not be enough to restore confidence in British markets, sparking renewed speculation that the Bank of England (BoE) will need to extend its emergency bond-buying intervention beyond Friday’s deadline.

Long-term yields on government bonds, which had tumbled in anticipation of Ms Truss tearing up Mr Kwarteng’s £45 billion package of unfunded tax cuts, shot higher on Friday afternoon. The 30-year yield ended the week at about 4.8 per cent, having earlier on Friday sunk as low as 4.2 per cent — giant swings for a market that typically moves in much smaller increments.

“The market was hoping for a lot more,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “It doesn’t feel like enough of a pivot at this stage.”

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JPMorgan economist Allan Monks added that “further measures will be necessary to demonstrate medium-term fiscal sustainability”.

The losses for UK government bonds came after the BoE purchased just £1.4 billion of gilts in the final instalment of its 2½-week emergency intervention that had helped stem a liquidity crisis in the pensions industry.

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The £19 billion of purchases over the past 2½ weeks has fallen far short of the maximum £65 billion size of the programme. The low volumes had spooked investors, prompting the BoE to widen the scope of its intervention this week to include inflation-linked bonds as a fresh wave of turbulence in the gilt market sent 30-year yields soaring above 5 per cent.

The BoE initially put the emergency intervention in place on September 28th, five days after Mr Kwarteng’s mini-budget set off a powerful gilt sell-off. Falling gilt prices had prompted a vicious circle in which pension schemes, hit with collateral calls, were rapidly selling gilts into a falling market. The BoE fretted that, had it not stepped in, pension funds could have ditched up to £50 billion worth of gilts in a short time frame.

BoE governor Andrew Bailey was emphatic earlier this week that the scheme would end on Friday, telling the pension industry they had just days to sell assets to the central bank in order to replenish their cash buffers. Privately, BoE officials told banks before Mr Bailey’s remarks that the bank was prepared to extend its bond purchases if another severe bout of turbulence hit, the Financial Times reported earlier this week.

A senior executive with a large pension fund, who did not wish to be named, said the BoE’s gamble, by not extending its support programme, “has not paid off. We will be back to 5 per cent by Monday and then the merry-go-round will start again,” said the executive, referring to the 30-year gilt yield. — Copyright The Financial Times Limited 2022