By Andy Bruce and William Schomberg
LONDON (Reuters) – British government borrowing costs rose again on Wednesday after Bank of England Governor Andrew Bailey told pension funds they had three days to fix liquidity problems before the bank ends emergency bond-buying that has provided support.
The 20-year gilt yield rose above 5% for the first time since Sept. 28. That was when the BoE moved to quell bond market turmoil triggered by the plans of the new government of Prime Minister Liz Truss for big, unfunded tax cuts.
The pound fell heavily late on Tuesday after Bailey delivered his blunt message on the sidelines of the semi-annual International Monetary Fund meetings in Washington.
“We have announced that we will be out by the end of this week. We think the rebalancing must be done,” he told an event organised by the Institute of International Finance.
“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.”
British financial markets have been under strain since new finance minister Kwasi Kwarteng announced the string of tax cuts with no details of how they would be paid for on Sept. 23.
Kwarteng and Truss say the tax cuts are needed to get Britain’s economy growing again. Data published on Wednesday suggested it was heading for recession.
The surge in borrowing costs has hammered some pension funds, prompting the BoE to launch its bond-buying programme on Sept. 28, doubling its size on Monday and then expanding it to include inflation-linked bonds on Tuesday.
Yields rose across the range of maturities on Wednesday with the sharpest increase in two-year gilts, up about 10 basis points on the day. Yields for index-linked bonds also rose.
Investors are nervous that Friday’s deadline for the end of the BoE’s bond-buying might come too soon for some funds. The central bank said on Tuesday that the situation posed a “material risk” to financial stability.
Bailey and other top officials have stressed that their support for the bond market – at time when they were supposed to be selling government bonds to wind down their huge stimulus for the economy – is temporary.
The Financial Times reported that the BoE had privately suggested to bankers that it could carry on buying bonds beyond Friday’s deadline if market conditions demanded it, citing three sources briefed on the discussions.
The BoE press office said it had no further comment to make beyond those of Bailey on Tuesday in Washington.
Economic data published on Wednesday showed Britain’s economy unexpectedly shrank in August and was probably on course for a recession even before the recent jump in borrowing costs, underscoring the broader challenge for the BoE, which is raising interest rates to tackle high inflation.
(Reporting by Andy Bruce; Editing by William Schomberg and John Stonestreet)
