UK long bonds poised for record rally as BOE moves to stem crash
UK 30-year bonds headed for their biggest-ever rally after the Bank of England stepped in to stem a disorderly market rout fuelled by forced selling from pension funds.
The yield on 30-year gilts plummeted as much as 100 basis points to below 4 per cent after the BOE said it would carry out temporary purchases of long-dated debt and delay planned bond sales under quantitative tightening. That’s the largest drop in data going back to 1996 on a closing basis.
The moves injected some desperately-needed confidence into the UK’s bond market, which showed signs of collapsing in the wake of the new government’s spending plans. Frantic selling had driven the yield up more than a percentage point since Friday to as high as 5.14 per cent, a level last seen in 1998.
“We have been seeing a disorderly rise in long-end gilt and linker yields in recent days, which could have driven a further uncontrolled rise if left unchecked,” said Daniela Russell, a rates strategist at HSBC Holdings. “In recent days, thousands of pension schemes have faced urgent demands for additional cash to post as collateral to meet margin calls.”
The BOE acted after being warned by investment banks and fund managers in recent days that collateral calls as soon as Wednesday afternoon could trigger a further crash in gilts, according to a person familiar with policy makers’ decision making.
The sudden spike in gilt yields was particularly worrisome for so-called liability-driven investment strategies, which are popular among UK pension programmes. They often employ leverage to match liabilities – that stretch decades into the future – with their assets. The sell-off in gilts required many to post more collateral.
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“This is essentially an exercise in short-term yield curve control,” said Geoffrey Yu, an analyst at Bank of New York Mellon Corp. “If they calm fixed income volatility it can help calm FX as well.”
The pound initially surged before falling back to trade 0.9 per cent weaker at US$1.0646 as of 2.10 pm in London, edging back toward a record low.
The BOE announcement came as banks were selling a £4.5 billion (S$6.9 billion) bond sale by the Debt Management Office, an increase of an outstanding green gilt that matures in 2053. Orders passed £30 billion, in contrast to last year’s previous offering of the same bond, which drew a much heftier £74 billion order book.
The fact that the debt syndication was lower than some predicted gave a “very bad signal about the lack of real investor interest in long gilts,” said Mike Riddell, a portfolio manager at Allianz Global Investors. NatWest Markets had expected the offering to be around £5 billion.
The bond priced at 1 basis points above an outstanding 2052 bond, according to a person familiar with the matter, who asked not to be identified because they’re not authorised to speak about it. The transaction was delayed after the death of Queen Elizabeth II earlier this month.
The BOE’s decision was recommended by the Financial Policy Committee amid fears of a “material risk” to financial stability. It highlights the challenges that policy makers face as they try to roll back years of monetary stimulus just as economies the world over sink into recession.
“The bigger picture is that this could be the first developed market central bank that is pivoting, where what is a temporary measure could well become long term,” Riddell said. BLOOMBERG
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