Bank of England intervenes in gilt market to support the economy: investment experts comment

by | Sep 28, 2022

Bank of England

Following this morning’s Bank of England decision to intervene in the gilt market, investment experts have been sharing their thoughts with Wealth DFM.

As it released the update earlier, the Bank said “In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

Stuart Clark, portfolio manager at Quilter comments:  “We have just seen the Bank of England (BoE) intervene in the gilt market today to try and calm the situation and this should provide some reassurance to the market. However, the BoE is trying to slow down all the plates spinning in the air without letting any fall and the Treasury during the “mini-budget” on Friday threw a bunch of marbles onto the floor to make it more challenging.

“By instigating targeted, controlled and (apparently) time limited intervention the BoE will try to support the economy in order to avoid a more expensive bailout if conditions continue to materially deteriorate while maintaining independence. Above all we need to see the government regain credibility with domestic and international investors and explain how they plan to pay for these tax cuts other than just through borrowing.” 

Donald Phillips, co-head of the Liontrust Global Fixed Income Team also welcomed today’s intervention as he comments: 

“Clearly there has been a vertical climb in UK government bond yields and the opposite in the value of the pound since UK Chancellor Kwasi Kwarteng’s (not so) mini budget last week. The impacts of this run were being felt acutely across financial markets. Today, the Bank of England announced a “strictly time limited” buying program to shore up the market in longer-dated bonds, designed, we assume, in particular to stop the damage being done to pensions by the violent increase in long-dated bond yields. The Bank has also announced a postponement in bond sales until the end of October, designed to help improve the balance in  the UK government debt market.

“This is a welcome piece of news in the short term, preventing for now a run on the gilt market. Ultimately, whilst inflation remains a problem, quantitative easing (QE), is unlikely to be anything other than a very short-term fix. Indeed, the Bank is clear that quantitative tightening (QT) will recommence at the end of October.

 “We hope this is buying the UK government time to address the flaws in their profligate fiscal policies, affording them some room to bring to parliament a plan based on the reality of the economy we have. Failure to address their fiscal plan, we believe, will likely lead to more pain in government bonds down the line.

The sobering issue of the UK’s finances under this government likely explains why the pound so far has not joined in with the rally seen this morning in government bond yields.”

Sandra Holdsworth, Head of Rates at Aegon Asset Management, said:  The Bank of England stepped in today to stop the gilt market from entering a vicious spiral.  Selling in the both the conventional and index linked gilt market has been intense in recent days.  This has led to a huge demand for cash to support derivative structures popular amongst pension funds.   Cash has been raised by selling more gilts , the prices fall and the circle continues.

“As a result at a meeting of the Bank of England’s Financial Policy Committee the Bank has noted the risks to UK financial stability from dysfunction in the gilt market and has taken action by announcing temporary and targeted purchases in the gilt market to start immediately.

“The Bank of England has stressed that this operation is purely as a result of market dysfunction and the potential risks to financial stability not a monetary policy decision .  However the planned reduction of the balance sheet that was due to start in earlier October has been postponed to the end of the month.”

Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown comments on the change of policy: “The Bank of England is now pursuing a topsy turvy set of policies, unleashing a fresh bond buying spree to try and bring down punishing rates – while at the same time still signalling it will aggressively hike interest rates to try and rein in runaway inflation. This shows what a bind the bank is currently in. It knows ultra-high bond yields will cause a ricochet of problems for companies and consumers and potentially cause instability in the housing market but it’s also very worried that the tax cutting spree will could cause inflation to rise to dangerous levels.

“The move that bank officials have made to step in now, just two days after it indicated it would wait until November, smacks of a bit of panic and also of frustration that the government appears to be digging in its heels, reluctant to perform a political U-turn. Instead, the Bank of England has been forced to pursue a monetary U-turn, an abrupt change of policy as the Bank’s monetary policy committee had been pursuing a policy of selling down the Bank’s bond holdings.”

Mike Owens, Global Sales Trader at Saxo Markets, said: “The Bank of England have announced they are to carry out temporary purchases of long dated UK bonds until 14th October to help alleviate current financial conditions and at the same time delay the sale of Gilts until October 31st in what will then mark to the beginning of tightening. The BoE say the purpose of this is to restore orderly conditions and aimed to be very targeted based on the issues effecting UK financial markets following the ‘mini-Budget’ from the new Truss government.

“This move from the Bank of England won’t stem moves against the UK debt and currency markets on their own. It’s a narrowly defined intervention that hopes to dampen the current shocks. We’re told that the Bank is meeting with the Treasury routinely week-on-week, and so now the focus will swing back to how the government plan to convince the market that their expansionist policy will provide the growth necessary to balance the UK’s finances.”

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