UK borrowing costs rise again as BoE meets bond plan deadline

LONDON, Oct 12 (Reuters) – British government borrowing costs rose again on Wednesday after Bank of England Governor Andrew Bailey told pension funds they had three days to resolve liquidity issues before the bank ended the emergency bond buying that provided support.

The yield on the 20-year gilt rose above 5% for the first time since September 28. It was then that the BoE moved to calm the turmoil in the bond market triggered by Prime Minister Liz Truss’s new government’s plans for deep unfunded tax cuts.

The pound fell sharply on Tuesday night after Bailey delivered his stark message on the sidelines of the International Monetary Fund’s semiannual meetings in Washington.

“We have announced that we will be out by the end of this week. We believe the rebalancing needs to be done,” he said at an event hosted by the Institute of International Finance.

“My message to the funds involved and all companies involved in managing these funds: You have three days left now. You have to do this.”

UK financial markets have been under pressure since new finance minister Kwasi Kwarteng announced the series of tax cuts without any details on how they would be paid for on September 23.

Kwarteng and Truss say the tax cuts are needed to get Britain’s economy growing again. Data released Wednesday suggested it was headed for recession.

Soaring borrowing costs have hit some pension funds, prompting the BoE to launch its bond-buying program on September 28, doubling in size on Monday, then expanding it to include inflation-linked bonds on Tuesday. .

Yields rose across the maturity spectrum on Wednesday with the biggest rise in two-year gilts, up about 10 basis points on the day. Yields on indexed bonds also rose.

Investors fear Friday’s deadline for the end of BoE bond purchases may come too early for some funds. The central bank said on Tuesday that the situation presented a “significant risk” to financial stability.

Bailey and other senior officials have stressed that their support for the bond market – at a time when they were supposed to sell government bonds to end their huge stimulus to the economy – is temporary.

The Financial Times reported that the BoE had privately suggested to bankers that it could continue buying bonds beyond Friday’s deadline if market conditions dictated, citing three sources briefed on the talks.

The BoE’s press office said it had no further comment beyond Bailey’s on Tuesday in Washington.

Economic data released on Wednesday showed the UK economy contracted unexpectedly in August and was likely on course for a recession even before the recent increase in borrowing costs, underscoring the broader challenge for the BoE , which raises interest rates to combat high inflation.

Reporting by Andy Bruce Editing by William Schomberg and John Stonestreet

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