Bank of England Governor Andrew Bailey’s blunt warning that fund managers have to cut vulnerable positions before the central bank ends debt purchases is sending a shiver around already fragile global bond markets. The strict deadline puts investors worldwide on notice that some of the pension funds managing £1.8 trillion ($2 trillion) in defined-benefit schemes may again blow up the gilt market. The specter haunting investors is that a wave of forced selling from Treasuries to corporate bonds will be set off as the funds move to exit positions that are only tenable because the BOE stepped in last month to buy UK gilts.
“Gilts are having an outsized impact on global bond yields and all eyes will be on the UK market for the rest of the week, and especially once the temporary purchase program ends on the 14th,” said James Wilson, a senior portfolio manager at Jamieson Coote Bonds in Melbourne. “If the BOE totally steps away, it could be horrific for gilt owners, as well as the pound.”
Treasuries fell Tuesday following Bailey’s comments, made at the Institute of International Finance annual meeting in Washington. They rallied on Wednesday after the Financial Times reported the BOE had told banks it was prepared to extend its emergency bond-buying program past Friday if market conditions demanded it. The newspaper cited people it didn’t identify, and didn’t say when the central bank had made those comments. Central banks have turned this year from guardians to grinches when it comes to markets, driving bonds into the the first global bear market in at least a generation as they prioritize the battle to quash inflation.
“The global message may be that markets must unwind trades that are going to fail anyway as rates rise and stay high, with a brief central-bank backstop,” Michael Every, a global strategist at Rabobank in Singapore, wrote in a note to clients in regards to Bailey’s comments. “Perhaps the BOE is sending the united message that the game has changed, Volcker-style.”
The global financial turmoil is spurring contagion concerns, especially for less liquid markets, according to Laura Fitzsimmons, executive director of macro rates and FX sales at JPMorgan’s Australian unit in Sydney. “What is happening with the BOE is adding more volatility when we really don’t need it,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. Spreads of asset-backed securities and mortgage-backed securities have widened in recent weeks as a number of investors tapped dealers about potential sales of their holdings after UK pension funds were forced to sell down some assets to meet margin calls, Chrystal said. Global credit spreads for such debt across currencies were only one basis point below their year-to-date high on Tuesday, a Bloomberg index shows.
Pound Rebounds on Report BOE Offers to Extend Bond Purchases
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Volatility jumps in sterling amid signaling whiplash
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Bailey comments on bond buying plan end had weakened pound
The pound swung to a gain after a Financial Times report appeared to walk back comments from Bank of England Governor Andrew Bailey, who had said the central bank is set to halt its market support this week. The British currency reversed a loss of as much as 0.4% to trade 0.2% higher in early London trading. The BOE had signaled privately to bankers it could extend a bond-buying program past Friday’s deadline, the FT said, though it was unclear from the report when that guidance was given.
Bailey told pension funds Tuesday they have just “three days left” to sort out their liquidity positions before emergency bond purchases will be halted. His comments came after UK debt markets closed but sent Treasury yields spiking and the sterling to a two-week low. “The pound has found some relief on the report of a reprieve for the gilt market but sterling is likely to remain fragile given that Governor Bailey was very clear that the program is temporary,” said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney. “Sterling still looks like a sell on rallies against a solid dollar, heading back to $1.08 and below in coming sessions.” The signaling whiplash left gilts set for another volatile session. The BOE’s unlimited debt purchase plan announced on Sept. 28 had spurred a turnaround in the market, but the benchmark 10-year note has almost erased gains since then. According to the FT, the BOE will decide whether or not to extend the facility on Thursday or Friday. The central bank is assessing whether affected liability-driven investment managers have built up enough cash reserves to meet margin calls, the newspaper said.
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