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Borrowing costs dive as Bank of England soothes gilt market

Borrowing costs dive as Bank of England soothes gilt market with pledge to buy long-dated bonds ‘on whatever scale is necessary’

Sterling soared and borrowing costs tumbled after the Bank of England’s blockbuster intervention to calm the febrile gilt markets.

The central bank said it would buy long-dated bonds ‘on whatever scale is necessary’ to ‘restore orderly market conditions’ after days of turmoil following last week’s tax-cutting mini-budget.

‘Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,’ it said, as fears rose of a meltdown in the pensions industry as rising bond yields wreaked havoc with funding models. 

Bond pledge: The Bank of England, led by Governor Andrew Bailey (pictured), has put its plans to start unwinding its £895bn quantitative easing money-printing on hold

The Bank, led by Governor Andrew Bailey (pictured), put its plans to start unwinding its £895billion quantitative easing (QE) money-printing on hold.

It was due to begin selling the gilts it has bought through QE next week but the first sale will be on October 31.

The move stunned the financial markets and 30-year gilt yields, which had risen above 5 per cent for the first time in 20 years, tumbled back below 4 per cent in the sharpest drop in a single day on record.

The yield on one-year, five-year and ten-year gilts also fell, easing borrowing costs for the Government, business and households, though all remain well above levels of a month and a year ago.

Sterling also rallied. Having crashed to an all-time low against the dollar of close to $1.03 early in the week, the pound rose above $1.09.

Daniela Russell, HSBC’s head of UK rates strategy, said the intervention was ‘reassurance the market was waiting for’. 

She added: ‘The announcement to suspend its programme to sell gilts and buy long-dated bonds is a big relief.’

Markets have been in turmoil for months with government borrowing costs rising and currencies around the world falling against a rampant dollar amid fears that soaring inflation will force central banks to raise interest rates so far that the global economy will tip into recession.

Response: The rate on 30-year gilt yields, which had risen above 5% for the first time in 20 years, tumbled back below 4% in the sharpest drop in single day on record

Response: The rate on 30-year gilt yields, which had risen above 5% for the first time in 20 years, tumbled back below 4% in the sharpest drop in single day on record

Stock markets have also been hit, though the FTSE 100 in London has fared better than many.

The scale and speed of the sell-off in British assets triggered further ructions on global markets, with the euro and Chinese renminbi hitting fresh lows against the dollar. 

‘It is like having a sandcastle where bits and pieces start falling off all together,’ said Olivier Marciot, at asset manager Unigestion. ‘I think the UK is one of those pieces. It is just adding to the pain, adding to the stress.’

The euro bounced back as did the pound after the Bank intervened, while stock markets arrested their slide.

In London, the FTSE 100 rose 0.3 per cent while the FTSE 250 climbed 0.1 per cent. Among the big gainers were commercial property stocks which have been hammered in recent sessions amid fears that rising interest rates would dent the value of office blocks, shopping centres and warehouses.

Land Securities gained 6.9 per cent, British Land 5.7 per cent and Segro 6 per cent. But life insurance and pension firms were hit. M&G was off 6.2 per cent, L&G by 5.6 per cent and Aviva by 4.9 per cent. Analysts warned of further volatility in coming days and weeks.

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