Enjoy the calm. BOE’s bond buying program ends next Friday.
— zerohedge (@zerohedge) October 7, 2022
The boss of the Bank of England has told investors that its bond-buying to stabilise pension funds will end on Friday, despite pleas to extend it.
Andrew Bailey said that managers have got to make sure that their funds are resilient.
Earlier the Bank of England made a fresh bond-buying move to try to calm markets.
It has been buying government bonds to try to help pension funds at risk of collapsing.
Earlier the Bank warned of a “material risk” to financial stability, and stepped in to buy bonds for the third time since the government’s mini-budget sparked alarm among investors.
The chancellor promised huge tax cuts without saying how he would fund them.
Earlier on Tuesday, one pensions industry body urged the Bank to extend its emergency support beyond Friday due to fears of further market turmoil.
But Mr Bailey said on Tuesday that help would stop at the end of the week, and urged pension funds to make sure that riskier investments were offset by less risky ones.
“You’ve got three days left now,” he told fund managers. “You’ve got to get this done.”
The pound dropped sharply against the dollar to below $1.10 after Mr Bailey’s statement.
Mr Bailey later told the BBC: “We are doing everything to preserve financial stability, you have my assurance on that.”
He added that pension funds have “an important task” to ensure that they are “done” in making sure they are resilient.
“I’m afraid this has to be done, for the sake of financial stability,” he said.
The government had earlier said it remained confident in its tax cuts plan, with Kwasi Kwarteng telling MPs he was “relentlessly focused on growing the economy” and “raising living standards”.
But Labour’s shadow chancellor Rachel Reeves said: “This is a Tory crisis that has been made in Downing Street, and that is being paid for by working people.”
The Bank’s warning about financial stability is rare and suggests it cannot confidently ignore the threat it sees to the financial system.
It is even rarer for several senior Bank executives to have indicated part of the blame for the turmoil may lie at the government’s door, the result of domestic policy.
The Bank was forced to intervene after government borrowing costs rose sharply despite actions it and the Treasury had taken to calm investors on Monday.
Those measures included:
- Chancellor Kwasi Kwarteng saying that he would bring forward his economic plan where he will spell out how he plans to pay for the tax cuts and provide an independent forecast on the UK economy’s prospects.
- And the Bank of England saying it was prepared to double the amount of bonds it was buying to help support their price, while reiterating its support would end on Friday.
On Tuesday borrowing costs remained close to the levels seen at the height of the market turmoil last month.
The Bank will now widen the emergency programme it launched on 28 September, when days after the mini-budget, investors began demanding higher rates of interest on those bonds and government borrowing costs surged to worrying levels.
The turmoil has forced pension funds to sell bonds due to concerns over their solvency, and threatened to create a downward spiral in bond prices as more were offloaded which left some funds close to collapse.
It has also fed through to the mortgage market, where hundreds of products have been suspended due to concerns about how to price these long-term loans.
Last week, interest rates on typical two and five-year fixed rate mortgages topped 6% for the first time in over a decade.
Former IMF deputy director Mohamed El-Erian told the BBC that the economy was on “shaky ground”.
He said financial systems going into turmoil “can cause a lot of damage”.
The government raises money it needs for spending by selling bonds – a form of IOU that is paid back plus interest in anywhere between five and 30 years.
But the sharp rise in the cost of new government borrowing – the interest on those bonds – reflects an anxiety among investors that the UK’s tax-cutting plans make it a risky investment bet.
By buying bonds, the Bank is hoping to help keep their price stable and prevent investors selling them in what it likened to a “fire sale”.
The Pensions and Lifetime Savings Association, which represents schemes managing about £1.3tn of retirement money, said many funds wanted the bond-buying programme to last until the chancellor delivered his economic plan on 31 October.
The Treasury said it was “working closely with other UK authorities to monitor the markets as is usual”.
Under pressure from its MPs, the government has been forced into a series of embarrassing climbdowns since the mini-budget, including U-turning on a plan to scrap the top rate of income tax.
Experts believe Mr Kwarteng will have to row back on more of his tax cuts or drastically cut public spending.
On Tuesday, the Institute for Fiscal Studies think tank warned government departments could see “big and painful cuts” of up to £60bn a year to balance the books when Mr Kwarteng announces his economic plan on 31 October.
Sir John Gieve, a former deputy governor for fiscal stability at the Bank of England, said the Bank had primarily stepped in to protect pension funds, many of which hold government bonds as investments.
However, he said the “underlying problem” was that investors did not believe the government would be able to cut spending enough before its growth measures took effect.
“The internal workings of the financial markets have thrown up an element of instability that the Bank is addressing. But the underlying move came on the back of the announcement of huge amounts of extra borrowing and tax cuts without a clear plan of how to pay for them,” he told BBC Radio 4’s Today programme.
“It’s one thing to [promise huge cuts], but can [the chancellor] actually deliver that?”
Prime Minister Liz Truss has said her £43bn of promised tax cuts will boost UK economic growth and therefore help pay for themselves.
The chancellor has also committed to publishing an independent forecast of the UK’s economic prospects by the OBR, the independent budget watchdog, at the same time as his economic plan – something he declined to do with his mini-budget.
Last week we cautioned readers that the market “calm” was set to end this coming Friday when the BOE’s bond buying program was coming to an end, while making it clear that there would be no actual end as the Bank of England is by now completely trapped, and any end to QE would spark a crash, and if anything the central bank would do more not less.
Enjoy the calm. BOE’s bond buying program ends next Friday.
— zerohedge (@zerohedge) October 7, 2022
Well, just two days later we found out just how trapped the BOE has become, when early on Tuesday morning the Bank of England announced that it would widen the scope of its daily gilt purchase operations – boosting not shrinking the moral hazard that got us here – to include purchases of index-linked gilts – technically, it said it would “temporarily absorb selling of index-linked gilts in excess of market intermediation capacity” – as “a further backstop to restore orderly market conditions”, following yesterday’s epic bond rout which shouldn’t have happened, and yet it did.
The central bank, whose purchases have dried up as nobody actually wants to sell to it as long as it is in the market but the moment it steps away there is an insta-crisis, said it was prepared to buy up to £5bn a day in index-linked UK government bonds as it warned of “dysfunction” in the gilt market. Its new intervention marks the first time it has purchased index-linked debt as part of its bond-buying schemes.
As Bloomberg notes, the decision to buy index-linked securities is unusual for the central bank, which only bought conventional gilts during previous rounds of quantitative easing. The BOE said on Tuesday that it will allocate up to £5 billion ($5.51 billion) to conventional gilts and £5 billion to index-linked gilts at each remaining buyback.
The latest measures, which were announced just before the opening of markets in London, came just a day after the BoE unveiled a new short-term funding program that it hoped would act as a pressure release valve for pension schemes that have been caught up in a vicious circle after chancellor Kwasi Kwarteng’s September 23 “mini” Budget set off a historic sell-off in gilts.
“Two interventions in 24 hours is pretty extraordinary,” said Sandra Holdsworth, UK head of rates at Aegon Asset Management, adding that the BoE’s steps showed how the problem in the pension industry was “much bigger than anyone thought a week ago.”
As we noted yesterday, the BoE’s emergency bond-buying scheme, which was launched on September 28, initially helped soothe jittery markets but selling picked up strongly on Monday when the US bond market was closed as analysts and investors worried about the program’s looming end date on Friday, just as we warned it would.
“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, pose a material risk to UK financial stability,” the bank said.
Inflation-linked gilts, which according to the FT is a market dominated by defined benefit pension schemes, came under particularly acute selling pressure on Monday. The 10-year yield had surged 0.64 percentage points to 1.24%, the biggest rise since at least 1992. Monday’s sell-off set a gloomy tone ahead of a £900mn 30-year inflation-linked gilt sale by the Debt Management Office due to take place on Tuesday.
Following the BoE’s intervention, the sale attracted solid demand, but the DMO paid the highest inflation-adjusted borrowing cost for any debt since 2008, with the bond pricing at a real yield of 1.55 per cent. Markets were steadier on Tuesday with the 10-year inflation-linked gilt yield falling back by 0.16 percentage points.
On Monday, conventional gilts also sustained a fresh bout of selling pressure that brought 30-year government borrowing costs to the highest level since the BoE announced its bond-purchasing scheme in September.
Separately, the BoE on Monday increased the limit on its daily bond purchases to £10bn, from £5bn previously. It kept that overall cap intact on Tuesday, but said it would buy as much as £5bn a day in conventional gilts and £5bn in index-linked gilts until the programme expires on Friday. Ironically, so far the central bank has only used a small portion of the total £65bn that it has allotted to bond buying; of course that will change the moment the bank steps away from the bid sparking an avalanche of selling.
The yield on 10-year inflation-linked securities dropped as much as 12 basis points after the BOE announcement, while a sale of £900 million of inflation-linked 30-year bonds from the government then saw strong investor appetite. Conventional debt initially also rallied, before paring gains, showing sentiment is still fragile.
While the BOE has stressed that it’ll stop a disorderly market from threatening the UK’s financial stability, investors warn the repeated interventions are coming at a cost of the central bank’s credibility. In the view of strategists, there’s little that the central bank can do to repair investor confidence shattered by government U-turns and risky policy.
“The BOE is clearly playing gilt selloff whack-a-mole,” said Antoine Bouvet, senior rates strategist at ING Groep NV.
“The policy of consistently acting at the last minute without putting a more credible long-term plan in place is unnerving for markets.”
“The root cause of the problem is that investor confidence in UK Plc has been shaken and the BOE is attempting to mask the symptoms of that given it can do nothing to address the cause,” said Richard McGuire, head of rates strategy at Rabobank.
What Antoine may not get, however, is that there is no “credible long-term plan” when one tries to pull the monetary heroin to a market that is overly addicted, without sending the patient into a come. And the sooner markets realize just how trapped central banks truly are – something Bank of America’s Marc Cabana touched upon recently in ‘”Treasury Market Breakdown Is At Risk” – the faster we can get back to the zombie economy new normal that can’t possibly change without the much-anticipated great reset.
An interesting day that started with The BoE expanding its pension fund bailout, the IMF slashing global growth outlooks, and significant hawkishness from Mester refuting Brainard’s comments yesterday.
Things were all holding together in an ‘orderly’ fashion however until BoE’s Gov Andrew Bailey started speaking in Washington late in the day and went full “Leeroy Jenkins’…
After doubling-down on its pension fund bailout scheme, BoE’s Bailey spoke in Washington this afternoon, initially warning that “market volatility went beyond bank stress tests” (which is scary), then reinforcing that there is a “serious risk to UK financial system stability,” noting that the buying program is “temporary“.
But the piece de resistance was his reminding the market that BoE will be out by the end of the week, adding a simple threat…
“My message to the funds involved and all the firms is you’ve got three days left now,” Bailey said at an event in Washington on Tuesday.
“You’ve got to get this done. The essence of financial stability, is that it (intervention) is temporary. It’s not prolonged.”
Or what Andy?
What does the BoE Governor expect global markets to do now? Knowing that this is a “serious risk to financial system stability” and more stressful than bank stress tests, what would you do with your investments?
Our tweet says it all…(Roughly translated: ‘you have 3 days to sell everything’)…
The Bank of England doubled down on the booze at the pension fund bailout party this morning (adding inflation-linked debt to its purchases to stabilize the market after a record surge in yields on Monday)… but no one turned up as Gilts and Linkers both saw yields higher despite billions in buying promised… [ ]
Here is live coverage from the Guardian
International Monday Fund says a ‘change in fiscal policy’ would help calm bond markets…on day that Bank of England steps up its bond-buying support
Markets brace for MORE turmoil after Bank Of England boss sent pound plunging by telling pension funds they have until Friday to balance their books and warned the current bailout will NOT continue past then
- Andrew Bailey, Bank of England governor, said it will stop support for the county’s bond markets this Friday
- Pensions funds had called for the Bank’s support to continue until at least October 31 and ‘possibly beyond’
- Mr Bailey said this will not happen and that they need to sort out their finances and balance their books
- There was another run on the Pound after the governor’s statement, as the sterling plunged against the dollar
The markets are braced for more turmoil after the head of the Bank of England sent the pound plunging by telling pension funds they have until Friday to balance their books before emergency support for the bond market is removed.
Andrew Bailey, the governor of the central bank, faced a fierce backlash last night after he warned those managing the pensions of millions of people in the UK that they have ‘three days left’ to sort out their finances.
The Bank had been supporting the country’s bond market in recent weeks after investors were spooked by the Chancellor Kwasi Kwarteng’s ‘mini-budget’ last month, injecting £65billion to stop it crashing.
declined to extend this support beyond Friday, October 14, a decision that sparked more chaos last night and is set to provide stormy conditions as the market opens this morning.
Speaking at an event organised by the Institute of International Finance in Washington today, Mr Bailey said there is no plan to help stricken pension funds – which are scrambling to raise an estimated £320billion – beyond this week.
He said: ‘We have announced that we will be out by the end of this week. We think the re-balancing must be done.
‘And my message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done.’
That’s despite calls from one pension industry body for the support to be continued until at least the end of the month ‘and possibly beyond’.
The Pensions and Lifetime Savings Association said it was ‘a key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon’.
Following the announcement by the governor, the pound plunged below $1.10 for the first time in weeks, dropping from 1.1178 to 1.0953 overnight.
This came after the Bank beefed up its earlier intervention by extending the range of bonds it will buy to include index-linked gilts – as it battled to stop a ‘fire sale’ that it said posed a ‘material risk to UK financial stability’.