By Andy Bruce
LONDON (Reuters) -Long-dated British government bonds sold off heavily on Wednesday to reach their lowest ebb in 20 years, after Bank of England Governor Andrew Bailey told pension funds they had just three days to fix liquidity problems.
Twenty- and 30-year gilt yields spiked to their highest level since 2002, both exceeding 5.1% as the BoE insisted that its emergency bond market support will expire on Friday as originally announced.
As of 1507 GMT yields on both gilts had settled back to 5.02% and 4.95% respectively, but still up around 10-15 basis points (bps) on the day.
Adding to investor unease, Britain’s government said it would not reverse its vast tax cuts or reduce public spending as it sought to stand firm in the face of yet more turmoil in financial markets.
While long-dated bond yields also rose in other countries on Wednesday, the move has been most severe in Britain, as in previous days and weeks.
Bank of England Governor Andrew Bailey said on Tuesday that British pension funds and other investors hit hard by a slump in bond prices had just three days left to fix their problems before the central bank would withdraw support.
Investors are sceptical, however, and the pensions fund industry has lobbied the BoE to extend its backstop for the bond market beyond Friday.
“Despite Governor Bailey’s comments to the contrary, it seems likely to us given current gilt market volatility that it will be necessary for the BoE to continue intervening in the long-end of the curve beyond the end of this week,” analysts from RBC wrote in a research note.
Pension funds have scrambled to raise cash since finance minister Kwasi Kwarteng sparked a bond rout on Sept. 23 when he announced the government’s plans for 45 billion pounds ($50 billion)of unfunded tax cuts.
The funds were forced to stump up emergency collateral in liability-driven investments (LDI), which use derivatives to hedge against shortfalls in pension pots, after gilts dropped sharply in value.
Many did so by selling gilts, sparking a vicious cycle of falling prices that forced the BoE to pledge to buy as much as 65 billion pounds of long-dated government bonds between Sept. 28 and Oct. 14 to allow a more orderly disposal of assets.
The BoE bought 1.98 billion pounds of inflation-linked gilts in its emergency buy-back operation. Yields for these bonds fell after the BoE’s purchases took place, having been up on the day previously.
The BoE also bought a record 2.38 billion pounds of long-dated conventional gilts, the most since the daily auction programme started. The BoE has so far bought 13.1 billion pounds of gilts under the programme.
Britain’s Debt Management Office also managed to sell 3.5 billion pounds of a new gilt maturing in 2027, with a coupon of 4.125%. It attracted bids worth 2.75 times the amount on offer.
Short-dated gilt yields fell 3-6 bps on Tuesday, while the 10-year yield was up 5 bps on the day at 4.49%, having earlier reached its highest since 2008 at 4.632%.
($1 = 0.9025 pounds)
(Reporting by Andy BruceEditing by William Schomberg)
