London September 27 2022: A relief rally in UK government bonds faltered Tuesday as investors braced for fresh supply and as Bank of England Chief Economist Huw Pill made the case for tighter monetary policy to contain inflation, reported by Bloomberg.
The losses were led by the long-end of the curve, with 30-year yields rising as much as 42 basis points to 4.96%, the highest since 2004. The UK government is preparing to sell more of an outstanding 2053 green gilt as early as Wednesday, and is expected to ramp up bond offerings further to finance stimulus measured announced last week.
BOE’s Pill said the fiscal plans unveiled by Chancellor of the Exchequer Kwasi Kwarteng on Friday require a significant policy response, adding to speculation the bank will have to hike rates aggressively. The BOE could not be indifferent to the repricing in markets, he added.
Money markets amped up wagers on BOE tightening after his comments, betting on close to four percentage points more hikes by May. That would take the BOE’s key rate beyond 6%, the highest since 2001.
A violent market rout that wiped billions off the value of UK government bonds over that past three days had showed tentative signs of easing earlier in the session. Yet the latest leg of the sell off was so forceful the spread between the five- and 30-year section widened the most since 1997 on a closing basis, a sign investors worry fiscal and monetary policy will remain far too loose.
Forced selling by pension funds may have compounded the moves, according to David Parkinson, sterling rates product manager at RBC Capital Markets. They tend to own long-dated debt to match liabilities that stretch decades into the future.
“The steepening of the long end today and yesterday is down to upcoming supply and pension fund selling triggered by collateral calls,” Parkinson said.
