Bank of England moves to calm bond market crunch after tax cut storm

LONDON (Reuters) – The Bank of England sought to calm a scorching storm in British bond markets, saying it would buy government bonds as much as needed to restore order after new Prime Minister Liz Truss’ tax cut plans caused financial chaos.

After failing to quell the sell-off with verbal interventions over the past two days, the Bank of England announced on Wednesday the immediate launch of its emergency bond purchase program aimed at preventing market turmoil from spreading.

The Bank of England warned that “should the dysfunction in this market persist or worsen, there will be a material risk to the UK’s financial stability”.

Since Finance Minister Kwasi Quarting outlined Friday’s plan for tax cuts on top of an energy bill bailout, all financed by a massive increase in government borrowing, UK mortgage markets have frozen, pension funds have canceled debt securities and corporate borrowing costs have soared.

A Treasury source said Courting would not resign and the government would not reverse its policy. Another person familiar with the situation said Truss remains supportive of Kwarteng and will announce more economic reforms soon.

The Bank of England will now buy up to 5 billion pounds ($5.31 billion) a day in British government bonds for at least 20 years, starting on Wednesday and running until October 14.

Its announcement, a surprising reversal of bond-selling plans it had amassed since the 2008-2009 global financial crisis, immediately lowered borrowing costs.

The 30-year gold bond yield is set to be the biggest drop on records since 1992. The British pound pared its earlier losses to rise against the dollar. At $1.0860, it is up 1.2% on the day and down by 11% in the past three months.

The Bank of England said it will return to its plan to sell bonds at the end of October.

But the political and economic shock waves that raised growing fears in foreign capitals continued to reverberate.

Kwarteng sought to reassure investment bank executives at a meeting that attendees described as tense, and two senior Bank of England officials withdrew from public events scheduled for Wednesday and Thursday.

One of the sources at the meeting said Quarting asked the assembled finance chiefs what they could do to calm the markets.

“They didn’t miss that he put the problem in their arms,” ​​the source said.

Investors and economists said the government’s plan to wait until November 23 to put in place its full debt-reduction policy, and the fact that the next Bank of England interest rate announcement was not scheduled until November 3, seemed at odds with the market frenzy.

Mojtaba Rahman of Eurasia Group said: “Truss and Kwarting are now facing a severe economic crisis as global financial markets are waiting for them to make policy changes that they and the Conservative Party will find unpalatable.”

system recovery

Kwarteng’s plans for deep tax cuts and deregulation to pull the economy out of a long period of stagnation were seen as a return to the Thatchers and Reaganomics of the 1980s.

But they have caused panic among some investors and anxiety among many lawmakers from the ruling Conservative Party.

Pension advisers said this was pressure in markets that pension schemes were selling government bonds to meet emergency collateral demands on underwater derivative positions, or selling to reduce their exposure because they couldn’t meet those cash calls.

“There are schemes that are running out of liquidity at the moment,” one pension adviser said before the BoE intervened. Another person familiar with the decision confirmed that the Bank of England moved because of the problems facing pension funds, the main holders of long-term debt securities.

The Bank of England said the buying was aimed at restoring orderly market conditions. “Procurements of any size necessary to achieve this outcome will be undertaken.”

Foreign government officials and international financial institutions began to reveal their criticism.

In a rare intervention over a G7 country, the International Monetary Fund urged Truss to reverse course.

US bond giant Pimco said it will be less confident in the pound than it was before last Friday’s announcement.

Spain’s Economy Minister Nadia Calvino has been more outspoken, calling the policy a disaster.

mad market

So far the government has refused to budge.

Kwarteng, an economic historian who was business minister for two years and a free-market man, insisted that tax cuts for the wealthy along with energy price subsidies are the only way to reignite long-term economic growth.

The agitation in the markets and the ensuing angst among conservative lawmakers will put enormous pressure on him and Truss, who was elected by the party’s roughly 170,000 members, not the broader electorate. The party holds its annual conference next week.

Conservative lawmaker Simon Hoare, who backed Truss’ rival Rishi Sunak, blamed the government and Treasury for the policies that sparked the market crash.

“They were made up there,” he said. “This incompetent madness can’t go on.”

One area of ​​concern to politicians directly is the mortgage market, after lenders withdrew record numbers of offers and anecdotal reports suggest that people have been struggling to complete or change mortgage deals.

A slump in the housing market would be a major shock in a country where years of home prices have created a sense of public affluence, and where home buyers are accustomed to more than a decade of ultra-low interest rates.

The IMF’s intervention is also symbolic in Britain: its bailout in 1976 in the wake of the balance of payments crisis led to massive spending cuts, and it has long been seen as a humiliating low point in the country’s modern economic history.

Written by Kate Holton; Additional reporting by Elizabeth Piper, William James, Dara Ranasinghe, Caroline Cohn, Sachin Ravikumar, Paul Sandel, Movija M and William Schomberg in London, Emma Pinedo Gonzalez in Madrid; Editing by Alex Richardson, Toby Chopra, William Schomberg and Catherine Evans

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