UK Bond Selloff Deepens as BOE Emergency Measures Fail to Support Market

Bank of England ‘not going to save the market’: BNY Mellon
Strategists doubt plan to restart active gilt sales on Oct. 31
Structures debt instruments from HELL strike again….. will they ever learn?

UK bonds slumped after the Bank of England’s moves to increase emergency backstop measures failed to reassure the market, suggesting there’s plenty more chaos in store for traders. Inflation-linked debt was the worst hit ahead of a bond sale, with the yield on 10-year inflation-linked bonds rising 64 basis points to 1.24%. That was more than double the size of the move in conventional debt and a record in data going back to 1992. Investors are dumping UK assets once again after a selloff that started in late September on concerns about the new government’s fiscal policies. While the BOE announced new measures to ease the pressure on pension funds caught up in the rout, it also confirmed its first program of emergency purchases would end as planned on Oct. 14, removing a key plank of support.

“The BOE is going to calm the market, but it’s not going to save the market,” said Geoffrey Yu, senior strategist at Bank of New York Mellon in London. While ensuring liquidity for the pension funds most badly affected, the central bank won’t cap yields, Yu added.

These funds “will need to closely manage their risk and be prepared for more shocks further up the line,” said Yu. The September selloff on concerns about the Liz Truss government’s borrowing-fueled tax cut plans saw the pound hit a record low against the dollar, central bank intervention and led to a humiliating government climbdown amid questions over credibility. The rout in sterling-denominated assets pressured funds to liquidate £50 billion ($55 billion) of long-term bonds, sparking fears of an industry meltdown. Monday’s moves suggested the same problems were building again. “The BOE will once again be concerned about the selloff in gilts and linkers leading to more collateral calls once again, the vicious cycle it hoped it put a stop to on Sept. 28,” said James Lynch, an investment manager at Aegon Asset Management. UK Treasury and BOE Step Up Action to Reassure Rattled Markets The BOE said Monday that it would buy up to £10 billion of gilts daily until its temporary bond-buying offer ends. It also announced a temporary extended repo facility that will run until Nov. 10 to help ensure pension funds have access to enough liquidity. Policy makers seem determined to show they’re not engaging in a new round of long-term quantitative easing — but in doing so, they are failing to achieve their aim, according to Daniela Russell, strategist at HSBC Holdings Plc.

“The market reaction so far has been far from encouraging and a sign of how precarious the situation may still be,” she wrote in a note. “By putting yet another end-date on the new measures, this time Nov. 10, the BOE risks prolonging the uncertainty.”

Chancellor of the Exchequer Kwasi Kwarteng had also sought to allay market concerns earlier Monday by saying that he will set out his fiscal strategy, along with forecasts for the economy endorsed by the budget watchdog, almost a month earlier than planned on Oct. 31. That puts it ahead of the BOE’s Nov. 3 interest-rate decision. The announcement came just as he prepares to travel with BOE Governor Andrew Bailey to Washington for the International Monetary Fund’s autumn meetings. The IMF has been critical of the UK’s fiscal plans. Investors are likely to remain wary ahead of that date, said Charles Diebel, head of fixed income at Mediolanum International Funds Ltd, especially given the government’s U-turn on a planned tax cut for the highest earners. “I think it’s a case of fool me once, shame on you, fool me twice, shame on me,” he said. “The jury is out as to what will be announced and how they will square the circle of public finances. In other words, the market is not convinced the answers will be satisfactory.” The moves Monday were so sharp that the BOE’s plan to push ahead with active gilt sales, already delayed once, is in doubt. It was postponed until Oct. 31, the same day that the government will set out details of its spending plan. The likelihood of another delay is growing, said Mizuho International strategist Peter McCallum. After the massive rise in real rates, “it’s in the BOE’s interest to show their support more forcefully,” he said. NN: these structured debt instruments let defined benefit retirement funds and for that matter funds and banks show more capitial then they really have, We are on the verge of another Lehman moment…… See Black Mask Blog at the top of the story.