Relief rally in UK, US markets after Bank of England ‘reassurance’

Investors on Wednesday piled into US stocks and government bonds, following a rally in UK assets after the Bank of England intervened to calm turmoil in the gilt market.

The central bank on Wednesday announced it would buy long-dated gilts in light of the recent “significant repricing” of UK government debt. “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the BoE said.

Thirty-year gilt yields, which earlier on Wednesday touched a 20-year high of more than 5 per cent, fell to 3.94 per cent. The long-dated debt posted its sharpest drop in yields for any single day on record, according to Tradeweb data. Yields on 10-year UK debt fell to 4.01 per cent from 4.59 per cent. Yields fall as investors buy the bonds, boosting prices.

The recovery in UK bonds bolstered the 10-year US Treasury, the yield on which fell 0.24 percentage points to 3.73 per cent as investors bought the notes. Earlier on Wednesday the yield pushed higher than 4 per cent for the first time since 2010.

The blue-chip S&P 500 ended the day up 2 per cent to end a six-session losing streak. The US benchmark on Tuesday touched its lowest intraday level since November 2020 over investor concerns about the pace of interest rate rises to combat inflation, as well as the effects of the UK’s fiscal and monetary policy on global economic growth. The tech-heavy Nasdaq Composite rose 2.1 per cent.

The BoE move was the “reassurance the market was waiting for” said, Daniela Russell, head of UK rates strategy at HSBC.

“The announcement to suspend its programme to sell gilts and buy long-dated bonds is a big relief for the market and we are seeing that with the fall in yields and flattening of the curve,” she said.

The pound and UK government debt have sold off sharply since chancellor Kwasi Kwarteng announced last Friday his plan for £45bn worth of unfunded tax cuts.

Sterling gained 1.4 per cent to $1.09 following the BoE’s intervention on Wednesday, but analysts warned the relief would probably be shortlived.

Adam Cole, head of FX strategy at RBC Capital Markets, said the BoE’s measures were being viewed as “something to address specific issues in the gilt market in the short term”.

“The underlying issues that have driven the pound down — the worsening deficits and apparent dominance of ideology over economics in fiscal policy — have not changed,” he said.

UK equities rebounded following the central bank’s move. The FTSE 100 closed 0.3 per cent higher, but had been down 1.9 per cent earlier in the session.

The BoE said the bond buying would begin on Wednesday. The bank’s plan to reduce its balance sheet by selling gilts in its portfolio, which was due to begin next week, has now been pushed back a month.