Liz Truss has been handed a massive lifeline in the fight to save her job as markets gave their verdict on new Chancellor Jeremy Hunt today. Yields on 30-year and 10-year Government bonds – also known as gilts – tumbled by around eight percent in early trading as the Chancellor soothed volatile markets with an announcement he will bring forward a fiscal statement.
A UK gilts 30-year index chart shows a sharp fall. This means people are buying as yield and price are inverse to each other.
The pound has also bounced back this morning in anticipation of a key statement from the newly appointed Chancellor Jeremy Hunt who faces the big job of repairing the fallout from the Government’s disastrous mini-budget.
Sterling soared by as much as 1.1 percent to hit $1.1294 against the US dollar soon after the Treasury revealed that Mr Hunt would deliver key parts of a medium-term plan later today in support of “fiscal sustainability”.
There had been fears that a sell-off in gilt markets would resume this morning after the BoE ended its Government bond-buying scheme. Worries of a sell-off were also raised after a U-turn on Corporation Tax on Friday failed to ease investor concerns.
The BoE stood firm and ended its emergency gilt-buying programme – despite fears it could trigger a return to volatile market conditions which sparked a damaging sell-off in gilts. This caused chaos after some pension funds were left on the verge of collapse.
In a statement before markets opened this morning, the BoE said its bond-buying programme had “enabled a significant increase in the resilience of the sector”.
It said: “In line with its financial stability objective, the Bank of England has carried out temporary and targeted purchases of long-dated UK Government bonds since 28 September.
“The Bank increased the maximum size of its daily auctions from £5bn to £10bn on 10 October. Index-linked government bonds were included within the temporary purchase scheme on 11 October.
“At the outset of the intervention, the Bank said that it would carry out temporary purchases on whatever scale was necessary to restore orderly market conditions.
“The purpose of the operations was to provide time for LDI funds to address risks to their resilience from volatility in the gilt market, not to provide a permanent backstop.
“As previously announced, the Bank terminated these operations and ceased all bond purchases on Friday 14 October. As intended, these operations have enabled a significant increase in the resilience of the sector.”
Liability-driven investment (LDI) policies and asset management decisions are largely determined by the sum of current and future liabilities attached to the investor, be it a household or an institution.
In a tweet, Sky News Economics Editor Mr Conway said: “I’m told UK regulators have identified one LDI fund at an asset manager which would face a series of ‘knockouts’ and potential collapse if gilt yields had risen markedly this morning.
“They believe the rest of the system is safe. Important background to HMT statement today.”