Bank of England intervenes in bond market - as it happened

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The Bank of England has taken emergency action to calm turmoil in financial markets amid the collapse in the pound and the increase in government borrowing costs triggered by Kwasi Kwarteng’s mini-budget last Friday.

Threadneedle Street said it was taking urgent steps to buy long-dated UK government bonds, beginning immediately in an attempt to stabilise the market. UK pension funds have apparently come under pressure to sell bonds. The central bank’s move calmed nerves in the bond market, where yields (or interest rates) fell sharply, especially for the 30-year bond, whose yield fell to 4% from 5.5% before the announcement.

The pound tumbled as much as 1.7% before steadying somewhat, but is still 0.5% lower on the day at $1.068.

The FTSE 100 index, which had earlier fallen nearly 2% to reach 6,836, was edging higher. [Update: it later closed at 7005.39.] Other European indices are still in the red, but have pared losses, with Germany’s Dax down 0.1%, France’s CAC down 0.38% and Italy’s FTSE MiB 0.9% lower. On Wall Street, the S&P 500 has edged 0.3% higher and the Dow Jones ticked up 0.1%, while the Nasdaq is flat.

This summary was amended on 29 September 2022, to remove an erroneous FTSE 100 figure, and to note the index’s status at close.

UK house prices are expected to drop by 10% to 15% next year, analysts and brokers predict, as mortgage providers pull deals and raise interest payments to levels not seen since before the 2008 financial crisis. A record 935 mortgage products were pulled overnight, according to Moneyfacts.

Our other main stories today:

Thank you for reading. We’ll be back tomorrow. take care! – JK

A record number of mortgages has been withdrawn from the market, as deepening turmoil in financial markets prompted more lenders to temporarily withdraw products for new customers. Some 935 products were pulled in Britain overnight, according to financial services provider Moneyfacts.

The volatility comes after the new UK government announced huge tax cuts funded by borrowing last Friday, leading to a plunge in sterling and a surge in government bond yields as concerns mounted over its ability to fund the plan.

Key points from the Bank of England announcement:

• To prevent an ‘unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy’ the BoE will temporarily purchase gilts on ‘whatever scale is necessary’.

• Auctions will begin today and last until 14 October. They are intended to tackle a ‘specific’ problem in the long-dated gilt market. UK pension funds have apparently come under pressure to sell bonds. The purchases will be unwound once market conditions normalise.

• Although the BoE’s £80bn annual target for the reduction of its balance sheet is unchanged, it has postponed the first sales – initially planned for next week - until 31 October.

The Bank of England’s move has bought the government time to fix its credibility, says Kallum Pickering, senior economist at Berenberg, following the chancellor’s package of £45bn of unfunded tax cuts that primarily benefit the wealthy.

Gilt yields may be volatile in coming days as the BoE wrestles with market forces to stem selling pressure. But the BoE is the ultimate backer of sterling-denominated paper. Betting against its ability to fix the market disorder – at least in the short term – is futile, in our view.

But to make the situation sustainable, the government needs to fix its own problems. On 23 November Chancellor Kwasi Kwarteng will unveil more of his fiscal plans. He should recognise that the recent disorder reflects perceptions about his and his government’s credibility and take decisive steps to shore up confidence.

Short of reversing or delaying some of his tax plans, his main task will be to come up with sensible spending plans which – when factored into the OBR’s model alongside the tax cuts in the Growth Plan – show that borrowing and debt will not balloon under his watch. At that point, markets may be ready to pay more attention to the positive elements of Trussonomics such as supply-side reform and pro-growth tax adjustments.

Gas prices have risen on fears that Russia could halt supplies to Europe through Ukraine, adding to turmoil caused by damage to the Nord Stream pipelines under the Baltic Sea, reports our energy correspondent Alex Lawson.

The Kremlin-controlled gas company Gazprom said it could impose sanctions on Ukraine’s Naftogaz due to ongoing arbitration.

The statement came after the discovery of leaks on the two Nord Stream gas pipelines under the Baltic Sea near the Danish island of Bornholm in a suspected act of sabotage, although exactly by whom or why remains unconfirmed.

The pound is off the day’s lows, and is now trading 0.6% lower at $1.0667.

Mike Owens, global sales trader at Saxo Markets, says:

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.

Victoria Scholar, head of investment at interactive investor, says:

Although the central bank refrained from an emergency rate hike to offset the slide for sterling in FX markets, it has now intervened in the bond market. Yields dropped in response with a flattening of the yield curve and long-dated bonds rallying. The financial policy committee has a mandate to ensure the stability of the financial system which is why it has stepped in today by buying 30-year gilts.

The intervention has resulted in some respite for this week’s bond market volatility. The Bank of England has demonstrated its resolve to restore order to fixed income markets.

The monetary policy committee is expected to carry out a jumbo rate hike at the start of November but the pound remains under pressure. Despite a brief pause in the selling yesterday, the downtrend for cable continues with sterling-dollar shedding more than 20% this year.

Here’s a bit more on the meeting between Kwarteng, and the financial secretary, Andrew Griffith, with executives from the investment banking sector, as part of a series of roundtables ahead of the chancellor’s financial services deregulatory package next month.

The chancellor discussed with the bankers how last Friday’s growth plan will expand the supply side of the economy through tax incentives and reforms.

Ahead of the upcoming “Big Bang 2.0 deregulatory moment for financial services,” Kwarteng reiterated that “a strong UK economy has always depended on a strong financial services sector.”

Among the attendees were executives from Bloomberg, the London Stock Exchange, the London Metal Exchange, UBS, Bank of America, Standard Chartered, Morgan Stanley, Citi, Deutsche Bank, JP Morgan Chase & Co and Rothesay.

Ryanair has not seen any impact on flight bookings in the UK in the wake of the pound’s slide and increases in mortgage rates, but the market is likely to be challenging, according to a senior executive.

Eddie Wilson, chief executive of Ryanair DAC, the largest airline in the group, said:

We’re not currently seeing an impact, but it would be foolish not to say that if interest rates are heading up and household bills are heading up, you’re going to have less money spent.

Kwasi Kwarteng has told investment bankers that the government is committed to fiscal discipline and that he is working closely with the Bank of England and budget forecasters. The Treasury said, referring to today’s meeting:

The chancellor underlined the government’s clear commitment to fiscal discipline and reiterated that he is working closely with the governor of the Bank of England and the OBR [Office for Budget Responsibility] ahead of delivering his medium term fiscal plan on 23 November.

Not sure this is the “urgent statement on how he is going to fix the crisis that he has made” that the Labour shadow chancellor Rachel Reeves, financial markets, and everyone else is looking for. The Labour leader, Keir Starmer, said today that 23 November is too far off.

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The Bank of England has set out the details of its bond purchases, aimed at stabilising the market after the government’s mini-budget last Friday prompted a selloff.

According to Reuters, it will buy up to £5bn of bonds per day initially, and it will be purchasing bonds with a maturity of more than 20 years, but those parameters will be kept under review.

You can read the Bank’s earlier statement in full here.

Rachel Reeves, shadow chancellor of the exchequer, has responded to the Bank of England’s emergency intervention in the government bond market today.

People will be deeply worried about the cost of their mortgage, about their pensions, and about the impact this will have on their cost of living.

This is a serious situation made in Downing Street and is the direct result of the Conservative Government’s reckless actions, which include tax cuts for the richest 1%.

Their decisions will cause higher inflation and higher interest rates - and are not a credible plan for growth.

The chancellor must make an urgent statement on how he is going to fix the crisis that he has made.

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The pound continues to lurch lower and is now worth $1.0549, a 1.7% drop on the day. On Monday, it hit an all-time low of $1.0327 against the dollar.

The dollar has strengthened against all major currencies and hit a 20-year high today, as it is generally regarded as a safer investment in turbulent times, and the US central bank has raised interest rates aggressively, giving investors a better return on their assets.

By comparison, the euro is down 0.38% against the dollar.

Sterling has tumbled 1.5% against the dollar to $1.0571 in volatile trading, as the Bank of England’s emergency intervention in the bond market calmed nerves among gilt traders, but failed to stabilise the British currency.

Paul Dales, chief UK economist at Capital Economics, notes that the “mini-budget resulted in 30-year gilt yields rising from 3.60% to 5.10%, which threatened financial stability by forcing pension funds to sell assets into a falling market in order to meet cash collateral requirements”.

He adds:

In response, and to prevent this from escalating into a full blown financial crisis, the Bank has done two things. First, it has postponed its plans to start selling some of its QE gilt holdings next week and will now do it on 31^st October. QT via active sales is still the plan, but it will start a month later.

Second, and more significantly, it has said that it will buy an unlimited amount of long-term gilts from today as necessary to “restore orderly market conditions” until 14^th October. In other words, the Bank is restarting QE, although for financial stability reasons rather than monetary policy reasons. These purchases will be temporary and will be “unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided”.

This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working. Since the announcement, 30-year gilt yields have fallen back from 5.10% to 4.30%, which have reversed about half of the rise in recent days. 10-year yields have also fallen this morning from 4.55% to 4.15% and 2-year yields have dropped from 4.70% to 4.35%.

While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position. It wouldn’t be a huge surprise if another problem in the financial markets popped up before long. Either way, the downside risks to economic growth are growing. And the chancellor’s 2.5% real GDP growth target is looking even more unachievable.

JPMorgan economist Allan Monks has sent us his thoughts on the Bank of England’s emergency intervention in the bond market.

The purpose of the Bank of England’s decision is to restore orderly market conditions and prevent an unwanted tightening in financial conditions that feeds back into the real economy. The BOE was keen to communicate its decision as a financial stability rather than a monetary policy decision, with purchases that are “temporary and targeted”. In this regard, today’s statement referred back to Monday’s statement that committed to raising rates as much as is necessary to bring inflation under control.

While the BOE’s response looks appropriate given recent developments in the gilt market, the optics are not favourable for the Bank and will inevitably prompt discussions about fiscal dominance and a monetary financing of the deficit. We think this is not entirely warranted, as the BOE has signalled it wants to exit this intervention at the first available opportunity and remains committed to undertaking sales soon after. However, the problem is whether market conditions will allow the BOE to do so on the time scale it has suggested, which in turn depend on the actions of the government.

A quick round-up of today’s main news. Here’s our story on the emergency move:

Liz Truss needs to review the budget urgently after “very serious” criticism from the International Monetary Fund and with the UK economy out of control, Keir Starmer has said.

The Labour leader said November would be too late for the government to revisit its plans, as people were “very, very worried” about the possibility of rising mortgage rates and inflation.

The rebuke from the IMF is a global embarrassment for Truss and Kwarteng, writes our economics editor Larry Elliott.

House prices in the UK are likely to fall by at least 10% next year as mortgage providers pull deals and raise interest payments to levels not seen since before the 2008 financial crisis, property experts have predicted.

Food prices in the UK have soared by a record 10.6% this month, as the war in Ukraine continues to drive the cost of staples such as margarine, pasta and tinned tomatoes to new highs.

Boohoo has issued a profit and sales warning as the cost of living crisis causes a slump in shopper demand for the fast-fashion brand’s products.

Virgin Atlantic’s crew, pilots and ground staff can now wear whichever of its uniforms they feel most comfortable in, regardless of the original male or female design of its red skirt suit or burgundy trousers.

The airline has announced a gender identity policy that lets its staff choose which of the Vivienne Westwood-designed outfits they wear to work – “no matter their gender, gender identity or gender expression”.

The Bank of England’s announcement appears to have calmed nerves in the bond and stock markets.

The yield, or interest rate, on the benchmark 10-year UK government bond has fallen further, to 4.1% (from over 4.5% before the Bank’s emergency intervention).

The two-year yield has dropped to 4.3%, while the 30-year yield is now at 4.2%, from above 5% before the announcement.

UK and European stocks have pared losses. The FTSE 100 index in London is now just 24 points lower at 6,964, a 0.3% drop. Germany’s Dax is down 0.8% (before the news, it had tumbled 2%), France’s CAC has lost 0.57% and Italy’s FTSE MiB is trading 0.85% lower.

The pound has resumed its downward path again, though, after receiving a fillip. It’s trading almost 0.5% lower at $1.0677 against the dollar, which has strengthened across the board, and hit an all-time high against China’s reminbi today.

The Treasury said the government will continue to “work closely” with the Bank of England, after the central bank announced it will launch a temporary UK government bond-buying programme as an emergency move to stave off a “material risk to UK financial stability”.

A Treasury spokesperson said:

The Bank of England, in line with its financial stability objective, carefully monitors financial markets and any potential risk to the flow of credit to the real economy, and subsequent effects on UK households and businesses.

Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions.

These purchases will be strictly time-limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury.

The chancellor is committed to the Bank of England‘s independence. The government will continue to work closely with the Bank in support of its financial stability and inflation objectives.

Before the Bank’s intervention, Britain sold £4.5bn of a 30-year ‘green’ government bond – but looked set to pay the highest interest rate of any government debt issued since 2008, amid the selloff in bonds in recent days.

The Debt Management Office said it will issue £4.5bn of the 2053 gilt. Bookrunners said it had been priced 1 basis point above the conventional 2052 gilt.

British 30-year government bond yields rose above 5% for the first time since 2002 today, and yielded less than 1% last December.