LONDON — The Bank of England on Tuesday announced an expansion of its emergency bond-buying operation as it looks to restore order to the country’s chaotic bond market.
The central bank said it will widen its purchases of U.K. government bonds — known as gilts — to include index-linked gilts from Oct. 11 until Oct. 14. Index-linked gilts are bonds where payouts to bondholders are benchmarked in line with the U.K. retail price index.
The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme on Friday.
The Bank launched its emergency intervention on Sep. 28 after an unprecedented sell-off in long-dated U.K. government bonds threatened to collapse multiple liability driven investment (LDI) funds, widely held by U.K. pension schemes.
“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the bank said in a statement Tuesday.
U.K. 10-year index-linked gilt yields rose by 64 basis points on Monday, representing a massive 5.5% fall in price. Meanwhile 30-year index-linked gilt prices were down 16% on the day, with yields now at around 1.5%, having been at -1.5% just six months ago. Yields move inversely to prices.
Moves of this magnitude are highly unusual in developed world sovereign bond markets.
“These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity,” the Bank said Tuesday.
“As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury.”
On Monday, the Bank set the upper limit of its daily gilt purchases at £10 billion ($11 billion), of which up to £5 billion will be allocated to conventional gilts and £5 billion to index-linked gilts.
The size of auctions will remain under review, the Bank said, and all purchases will be “unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.”
LONDON — The Bank of England on Wednesday announced a highly unusual market intervention in hopes of slowing the rush to dump pounds and U.K. bonds that began after new Prime Minister Liz Truss announced her centerpiece economic plan.
The central bank said that it would temporarily buy British government bonds, a remarkable move that follows the government’s announcement on Friday of its so-called “mini budget.”
“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” the Bank of England said in a statement.
The bank said that the purchases to “restore orderly market conditions,” would be “carried out on whatever scale is necessary to effect this outcome.” It also said it was time-limited to two weeks.
British pound falls to all-time low against dollar after taxes slashed
Truss, who is just three weeks into the job, is trying to change the British economy with bold — some would say risky — actions that have spooked investors. Truss has made no secret of her free-market views. During the leadership campaign to replace Boris Johnson as prime minister, she said that she would be a tax cutter from the get go.
On Friday, she delivered on that promise with the government announced huge tax cuts and a big jump in borrowing. The plans include the abolition of the top income tax rate of 45 percent for people earning more than 150,000 pounds and a scrapping of the cap on banker bonuses.
The markets gave their early verdict: On Monday, the pound sterling fell to an all-time low against the U.S. dollar, slumping to 1.03 at one stage before recovering somewhat. Some economists have said that the pound could drop to parity with the dollar.
On Wednesday morning, the pound slid back to 1.06 after reaching 1.08 on Tuesday.
“This, unlike other fluctuations in the market, is a self-inflicted wound,” said Keir Starmer, leader of the opposition Labour Party, told the BBC on Wednesday morning. His party is up 17 percentage points, according to a recent YouGov poll. This is the party’s biggest lead against the Conservatives since 2001, when the Labour leader Tony Blair won a landslide victory.
Truss will have to call a general election by January 2025 and is keen to put her ideas on the economy into motion.
On Tuesday, the International Monetary Fund issued a rare rebuke of the new British government’s handling of its economic policy.
In an unusually blunt statement, it said that it was “closely monitoring” the situation in the U.K., adding the government’s plans will likely “increase inequality.” Untargeted fiscal packages, it said, were not recommended during a period of high inflation.
Truss and her chancellor, Kwasi Kwarteng, have defended their vision for the economy.
“They are prepared to risk unpopularity because they think it will work in the long-term,” said Tony Travers, a politics professor at the London School of Economics.
He noted that, unlike some of her Conservative Party predecessors, including Johnson and Theresa May, Truss’s free market views were quite straightforward. Her government wants to “move Britain to be a lower tax, more flexible economy which competes head to head with highly paid workers and talent with the E.U. and globally.”
“Whether it works or not, only time will tell,” he said, adding, “whether it survives the short-term, time will tell sooner.”
LONDON (AP) — The Bank of England took emergency action Wednesday to stabilize U.K. financial markets and head off a crisis in the broader economy after the government spooked investors with a program of unfunded tax cuts, sending the pound tumbling and the cost of government debt soaring.
The central bank warned that crumbling confidence in the economy posed a “material risk to U.K. financial stability,” while the International Monetary Fund took the rare step to urge a member of the Group of Seven advanced economies to abandon its plan to cut taxes and increase borrowing to cover the cost.
The Bank of England said it would buy long-term government bonds over the next two weeks to combat a recent slide in British financial assets. The bank’s actions are focused on long-term government debt, where yields have soared in recent days, pushing up government borrowing costs.
“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,″ the bank said in a statement. “This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.″
The move came five days after Prime Minister Liz Truss’ new government sparked investor concern when it unveiled an economic stimulus program that included 45 billion pounds ($48 billion) of tax cuts and no spending reductions. It also wants to spend billions to help shield homes and businesses from soaring energy prices, sparking fears of spiraling government debt and higher inflation, which is already running at a nearly 40-year high of 9.9%.
The British pound plunged to a record low against the U.S. dollar Monday following the government’s announcement, and yields on U.K. government debt soared. Yields on 10-year government bonds have risen 325% this year, making it much more expensive for the government to borrow to finance its policies.
The Bank of England’s plan to buy government debt helped stabilize the bond market, with 10-year bond yields falling to 4.235% in midday trading in London.
Yields, which measure the return buyers receive on their investment, had risen to 4.504% on Tuesday from 3.495% the day before the tax cuts were announced.
The pound traded at $1.0628 on Wednesday in London, after rallying from a record low of $1.0373 on Monday. The British currency is still down 4% since Friday, and it has fallen 20% against the dollar in the past year.
Opposition parties demanded Parliament be recalled from a two-week break to confront the economic crisis. But Truss and Treasury chief Kwasi Kwarteng stayed silent and out of sight, gambling that the economic storm will pass.
Northern Ireland Secretary Chris Heaton-Harris, one of the few government ministers on view Wednesday, said the government’s policies would “make my country richer and more prosperous.”
“I think you will find economic policy takes more than a couple of days,” he said.
On Monday, the Bank of England had refrained from an emergency interest rate hike to offset the slide in the pound but said it would be willing to raise rates if necessary.
But the bank’s next scheduled meeting is not until November, and the lack of immediate action did little to bolster the pound. The bank was able to step in immediately with bond purchases because its Financial Policy Committee has a mandate to ensure the stability of the financial system.
The British government said it has fully underwritten the central bank’s intervention on government bonds, known as gilts.
“The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated U.K. government bonds from today in order to restore orderly market conditions,” the Treasury said in a statement.
The U.K. government has resisted pressure to reverse course but says it will set out a more detailed fiscal plan and independent analysis from the Office for Budget responsibility on Nov. 23.
Kwarteng met Wednesday with executives from investment banks including Bank of America, JP Morgan, Standard Chartered an UBS in a bid to soothe markets alarmed by its economic plans.
The Treasury said Kwarteng underlined the government’s “clear commitment to fiscal discipline” and promised new measures soon to boost economic growth, including deregulation of financial services.
The economic turmoil is already having real-world effects, with British mortgage lenders pulling hundreds of offers from the market as brokers waited to see what the bank would do on rates.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the Bank of England move “smacks of a bit of panic and also of frustration that the government appears to be digging in its heels, reluctant to perform a political U-turn.”
HONG KONG/TOKYO, March 28 (Reuters) – The Japanese yen slipped nearly 1% to a six-year low on Monday, after the Bank of Japan intervened to stop government bond yields from rising above its key target, while rising U.S. yields pushed the dollar higher against other currencies too.
The BOJ, which has repeatedly said it is committed to keeping monetary policy loose, on Monday made two offers to buy an unlimited amount of government bonds with maturities of more than five years and up to 10 years. The central bank is aiming to stop rising global interest rates from pushing up Japanese yields.
The dollar climbed roughly 0.95% to 123.25 yen, its highest since December 2015. It rallied over 7% so far in March, its biggest monthly gain in over five years.
Register now for FREE unlimited access to Reuters.com
Register
“The market sees monetary policy divergence between the U.S. and Japan as the key driver of dollar-yen, so in contrast to the hawkish Fed comments recently, the (BOJ’s action) gives the impression that the BOJ remains dovish, and that’s leading to a higher dollar-yen,” said Shinichiro Kadota, senior currency strategist at Barclays in Tokyo.
“I think the risk is still to the upside in the near term, especially if this monetary policy divergence story stays intact. But the speed has been quite fast and it does seem a little overheated, so if we see any contrary headlines, we could see some correction as well,” he added.
The 10-year Treasuries yield was last 2.5567%, its highest since May 2019, and up 6.5 basis points on the day, as traders position themselves for an aggressive series of rate hikes from the U.S. Federal Reserve.
The two year yield was 2.412%, its highest since April 2019, with these higher rates underpinning the dollar. The greenback index against a basket of major rivals advanced 0.38% to 99.194.
The euro slid 0.27% to $1.0950 and sterling lost 0.36% to $1.3150.
“We expect that the euro will remain heavy this week. The balance of risks suggests EUR/USD may test 1.0800 in coming weeks,” said CBA analysts in a note.
Inflation figures from major European economies and the eurozone are due from Wednesday, which could also affect the direction of the euro.
Also potentially driving the dollar this week is Friday’s non farm payroll data in the U.S., though given the market is already positioned for an aggressive pace of rate hikes this year, its effect could be muted say analysts.
The Aussie dollar bucked the trend however, inching higher to $0.7513 to hold near last week’s four-month high, helped on the day by rising Australian bond yields, as well as the longer term impact of higher commodity prices.
Aussie currency watchers are also looking out to Australia’s budget on Tuesday. Australia’s Treasurer said on Sunday the budget would mark a very significant material improvement to the government’s bottom line.
One possible headwind for the Aussie is the COVID-19 situation in China, after Shanghai said on Sunday it would lockdown the city to carry out COVID-19 testing.
The dollar climbed to a two week high of 6.3986 on the offshore yuan on Monday morning, before paring gains.
In cryptocurrency markets bitcoin was sitting pretty around $46,900 after jumping to as high as $47,766 in early trading, its highest level since early January.
Ether , the world’s second largest cryptocurrency, was at $3,320.
Register now for FREE unlimited access to Reuters.com
Register
Reporting by Alun John in Hong Kong and Kevin Buckland in Tokyo; Editing by Shri Navaratnam
Our Standards: The Thomson Reuters Trust Principles.
US intelligence agencies found evidence this year of construction work on what they believed was a secret Chinese military facility in the United Arab Emirates, which was stopped after Washington’s intervention, according to a report on Friday.
The Wall Street Journal reported that satellite imagery of the port of Khalifa had revealed suspicious construction work inside a container terminal built and operated by a Chinese shipping corporation, Cosco.
The evidence included huge excavations apparently for a multi-storey building and the fact that the site was covered in an apparent attempt to evade scrutiny.
The Biden administration held urgent talks with the UAE authorities, who appeared to be unaware of the military activities, according to the report. It said the discussions included two direction conversations between Joe Biden and Abu Dhabi’s Crown Prince Mohammed bin Zayed al-Nahyan, in May and August.
In late September, the US national security adviser, Jake Sullivan and the White House Middle East coordinator, Brett McGurk, went to the UAE and presented the details of the US intelligence on the site to the Emirati authorities, with McGurk returning this week to meet the crown prince. After US officials recently inspected the Khalifa site, construction work was suspended, the report said.
The report comes four years after the Chinese navy established a facility in Djibouti, its first overseas base, which was placed within a Chinese-run commercial port, at Doraleh.
The UAE embassy in Washington did not immediately respond to a request for comment but told the Wall Street Journal: “The UAE has never had an agreement plan, talks or intention to host a Chinese military base or outpost of any kind.”
“The Emiratis have said this isn’t happening,” a senior US official said. “I refer you to the Emiratis about this specific project. But I can tell you that we are committed to our enduring partnership between the United States and the UAE.”
The UAE report is the latest example of an increasingly pointed global rivalry between the US and China. On the same day, the state department warned Beijing the US would intervene to defend Philippines ships in the event of an armed Chinese attack, following an incident in which Chinese naval vessels used water cannon against Philippine resupply boats in the South China Sea.
The state department spokesman, Ned Price, called the Chinese action “dangerous, provocative, and unjustified.”.
Beijing “should not interfere with lawful Philippine activities in the Philippines’ exclusive economic zone,” Price said in a statement. “The United States stands with our Philippine allies in upholding the rules-based international maritime order and reaffirms that an armed attack on Philippine public vessels in the South China Sea would invoke US mutual defense commitments.”
The White House coordinator for the Indo-Pacific, Kurt Campbell, said: “The chief characteristic of US-China relations right now is competition, and we are competing across the board everywhere.”
“We believe it’s possible to compete responsibly in a healthy way, but at the same time, the president … recognizes that it will be important to try to establish some guardrails … that will keep the relationship from veering into dangerous arenas of confrontation,” Campbell said at the US Institute for Peace on Friday.
Campbell said that at their virtual summit at the beginning of the week, Biden and Xi Jinping agreed on tentative steps towards establishing talks between officials of both countries aimed at reducing the risk of conflict by accident or miscalculation, especially when it came to nuclear weapons.
“What we would like to do … is to enlist China in discussions about what we would do if we faced some sort of acts that were inadvertent,” he said. “We are in the very earliest stages of that kind of discussion, and I think it would be fair to say that President Xi indicated that they would at least engage in that discussion, that we would identify potentially who the right people would be for that kind of discussion, and that would involve people on the military side perhaps, and other parts of our governments as well.”
Campbell said that Biden had also sought talks on the nuclear policies of both nations, but suggested Xi had yet to agreed to those kind of discussions.
“We want to just have a very general discussion on what we might call doctrinal issues about … certain steps that you might take in the nuclear realm [that] would be potentially destabilizing,” he said. “China in the past has never been interested in arms control. They have been generally reluctant to talk about operational limitations. And they’ve been very careful about revealing anything associated with key attributes of their defense posture and the like. So I think we go into this carefully.
“I was in the meeting,” Campbell added. “I think President Xi indicated that he was prepared for some of this, but I think that’s going to have to be tested over time.”