© Reuters. People cross Waterloo Bridge during the evening rush hour with the skyscrapers of the City of London financial district seen in the background in London, Britain, October 10, 2022. REUTERS / Toby Melville
By Andy Bruce and William Schomberg
LONDON (Reuters) – British government borrowing costs rose again on Wednesday after Bank of England Governor Andrew Bailey told pension funds they had three days to fix liquidity problems before the bank finished buying the emergency bonds provided assistance.
The 20-year gold-plated yield rose above 5% for the first time since Sept. 28. That’s when the BoE took steps to quell the turmoil in the bond market caused by Chancellor Liz Truss’ new government plan on large tax cuts, not yet refunded.
The pound fell sharply late Tuesday after Bailey delivered his blunt message on the sidelines of the semi-annual International Monetary Fund meeting in Washington.
“We have announced that we will be shutting down this weekend. We think a rebalancing has to be done,” he said at an event organized by the Institute of International Finance.
“My message to the funds involved and all the companies involved in the management of those funds: You now have three days left. You have to get this done.”
UK financial markets have been tense since new finance minister Kwasi Kwarteng announced a string of tax cuts with no details on how payments will be made on September 23.
Kwarteng and Truss say tax cuts are needed to get the UK economy back on track. Data released on Wednesday showed it was headed for a recession.
The increase in borrowing costs has hit some pension funds, prompting the BoE to launch a bond-buying program on September 28, doubling its size on Monday and then expanding it to include including bonds linked to inflation on Tuesday.
Yields rose in the futures range on Wednesday with the strongest gains in two-year gilts, up about 10 basis points on the day. Yields on index-linked bonds also increased.
Investors worry that Friday’s BoE bond-buying deadline may come too soon for some funds. The central bank said on Tuesday that the situation poses “material risks” to financial stability.
Bailey and other top officials have stressed that their support for the bond market – at a time when they are supposed to sell government bonds to ease their massive stimulus – is temporary. time.
The Financial Times reported that the BoE had privately suggested to bankers that they could continue to buy bonds beyond Friday’s deadline if market conditions required it, citing three sources briefed on the discussions. essay.
The BoE’s press office said it had no further comment beyond those made by Bailey on Tuesday in Washington.
Economic data released on Wednesday showed Britain’s economy unexpectedly contracted in August and was perhaps on track for a recession even before the recent spike in borrowing costs, underscoring the big challenge. than for the BoE, it is to raise interest rates to tackle high inflation.