The end of BoE gilt buying looms large
The Bank of England (BoE) tried – and failed – to reassure markets about the end of its gilt-buying program on 14 October. Despite a greater buying capacity of £10bn at each of the remaining operations, offers were limited and the BoE only managed to buy less than £1bn on Monday. The underlying concern is that even as its intervention draws to a close, not enough deleveraging has been achieved by pension funds, and that another wave of forced selling will emerge into next week.
Volatility could well force the BoE back to the gilt market, maybe as early as today
As the BoE itself has said, the aim of the buying facility was to buy pension funds time to shore up their liquidity position. Concerns remain about whether the last week-and-a-half was enough to achieve this in distressed market conditions. Eventually, the gilt sell-off could force the BoE back into the market. As we wrote at the time, we think a longer period of support for gilts will be necessary to restore market confidence. 30Y gilts traded at 4.7% yesterday, just 30bp below their pre-intervention peak, and their weakness dragged the pound lower. Volatility could well force the BoE back to the gilt market, maybe as early as today. And indeed, the Bank just announced that it will extend its purchases to inflation-linked gilts, adding one buying operation of up to £5bn each day this week to the already scheduled conventional gilt purchases.
Helpfully, the announcement came alongside the launch of a repo facility accepting a broader range of assets as collateral. The idea is that instead of being forced sellers of, say, corporate bonds due to growing margin requirements, pension funds could instead pledge them as collateral to obtain financing. The facility will be in place for one month. In our view, this should be viewed as a complement to support the gilt market, not as a replacement, as a gilt sell-off (30Y yields have risen 110bp since their post-intervention through, for 30Y inflation-linked gilts, that figure is over 150bp) could still generate margin calls that exceed the fund’s funding capacity. In a further sign of its concern for market stability, the BoE also temporarily suspended its corporate bonds' quantitative tightening (QT) sales for two days.
|
