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UK government bonds rallied and stocks pared their losses on Wednesday after the Bank of England announced it would buy long-dated gilts in a bid to calm market turmoil.
In a statement on Wednesday, the BoE noted the recent “significant repricing” of UK government debt and said “were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability”.
Thirty-year gilt yields, which earlier on Wednesday touched a 20-year high of more than 5 per cent, fell to 4.28 per cent. Ten year yields fell to 4.03 per cent from 4.59 per cent.
The emergency action from the BoE came ahead of a sale of new 30-year debt later on Wednesday that will show how much the government will have to pay to borrow money in the market.
The pound and UK government debt have sold off sharply since chancellor of the exchequer Kwasi Kwarteng announced his plan for £45bn worth of unfunded tax cuts on Friday last week. Sterling remained under pressure, down 0.6 per cent to $1.066.
The IMF on Tuesday launched a withering attack on the UK’s plan and urged the government to “re-evaluate” the package.
Equities reacted positively to the BoE’s intervention. The FTSE 100 traded down 0.4 per cent, a sharp improvement from losses of 1.9 per cent earlier in the session.
The Europe-wide Stoxx 600 was down 0.5 per cent, having pulled back from losses of 1.8 per cent.
The BoE said the bond-buying would begin on Wednesday, and pushed back by a month the start of its plan to reduce its balance sheet by selling gilts in its portfolio, which was due to begin next week.
Futures tracking the S&P 500 pointed 0.2 per cent lower after the US benchmark touched its lowest intraday level since November 2020 on Tuesday on investor concerns about the pace of interest rate rises to combat inflation, and their effect on global economic growth.
Asian stock markets dropped on Wednesday, with Hong Kong’s benchmark Hang Seng index down 3.4 per cent. China’s CSI 300 fell 1.6 per cent and Japan’s Topix was down 1 per cent.
US government debt rallied followed the BoE’s statement. The 10-year US Treasury yield fell to 3.9 per cent as investors bought the notes, having earlier pushed the yield higher than 4 per cent for the first time since 2008.
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