Despite objections from British Prime Minister Liz Truss and the billions of dollars the Bank of England is spending to ease liquidity strains among pension funds, uncertainty has returned to the bond market. He on Friday afternoon.
That has left a sense of anxiety about what will happen when markets reopen on Monday.
Even before Ms Truss announced she would fire the Exchequer chancellor and introduce another key tax policy, Friday was an important day in the UK financial markets.
It was the last day of the Bank of England’s two-and-a-half week intervention on the UK bond market, buying government securities. The central bank jumped into the market in late September to avert “fire selling” and financial turmoil after the government’s tax cut plan rattled markets, sending bond yields and Mortgage rates rose sharply and put pension funds at risk.
But even as Ms. Truss is speaking, and as the central bank buys its last government bonds under the program, bond yields are rising.
Ms. Truss’ policy reversal, intended to ease the nerves rattled by billions of unreimbursed tax cuts, had an effect that was almost “equal and opposite” as it signaled political turmoil, fueling speculation about how long she will last as prime minister, said Antoine Bouvet, an interest rate strategist at ING.
“The shape of successful government policy will be difficult for the market to predict,” said Mr Bouvet.
There is an element of fear in the market because of “the political uncertainty coupled with the fact that the market is working on its own – no more central bank intervention,” he said.
“Personally I am worried and the market sentiment is worried,” he added.
Earlier this week, the pension fund industry lobbied the bank to extend a program designed to help tackle liquidity problems. But Andrew Bailey, the bank’s governor, is adamant that it will end on Friday, telling the industry: “You have to get this done.”
There was concern that once the central bank pulled out of the market, the volatility caused by the government’s September 23 policy statement would return and bond yields would move higher. Higher yields are increasing the cost of borrowing, interest payments and government mortgage rates for households.
Speculation that the government would back off on more tax cuts – worth £43bn and financed by borrowing – helped markets rallied midweek. But once Ms Truss laid out the widely expected U-turn and said she would not cancel her plan to raise corporate taxes worth around £18bn, yields rose again.
The 30-year yield closed Friday at 4.78%, about 0.2 percentage points higher than the previous day. On September 22, the day before the government announced the tax cut plan, the yield was 3.78%.
Despite Friday’s news, the feeling that the central bank and government are working with cross-purposes still prevails. The government has committed to an updated fiscal plan by October 31 and now more than half of the previously announced tax cuts are still in place, according to the Resolution Foundation, a private organization. consultant based in London.
On November 3, the central bank will make its next interest rate decision. The bank’s chief economist has previously said it would need to be “significant”.
At the same time, the central bank wants to avoid the impression that its bond-buying program is shielding the government from the market consequences of its actions. Analysts say this is one of the reasons the company is so determined to limit its bond purchases to the short-term, even if it’s a bit tricky when pension funds will deal with their liquidity problems. timely.
It may not be clear until Monday if this gamble is successful.
