Bank stops buying government bonds

The Bank of England has stopped buying government bonds for the first time since its emergency intervention to stabilise the market, in a signal that the panic that gripped gilts has subsided. The Bank of England said it rejected all £2.2 billion worth of bonds offered for sale by investors yesterday, despite having up to £5 billion to spend. The rejection of so many offers suggests that sellers’ cash calls are no longer as urgent as they were a week ago when the Bank stepped in.

THE Bank of England has stopped buying government bonds for the first time since its emergency intervention to stabilise the market, in a sign that the panic that gripped gilts has subsided.

The Bank said it rejected all £2.2bn worth of bonds offered for sale by investors yesterday, despite having up to £5bn to spend.

The rejection of so many offers suggests sellers’ cash calls are not as urgent as they were a week ago.

Threadneedle Street officials launched an emergency bond-buying programme last Wednesday after being warned that “dysfunction” in the market risked pushing some pension funds into insolvency.

Emergency cash calls were forcing pension funds to sell gilts to raise cash, which in turn triggered more cash calls.

The Bank pledged to spend up to £65bn buying gilts, committing to spend up to £5bn each day until Oct 14 to stabilise the market.

Yesterday it emerged that Kwasi Kwarteng, the Chancellor, had authorised the Bank to spend up to £100bn.

However, just £3.7bn has been spent via the facility so far and the Bank purchased just £22.1m of government bonds on Monday in a sign that market stability was returning.

Pension and insurance giant Legal & General said the Bank’s market intervention had “helped to alleviate the pressure on our clients”.

Yields on 30-year gilts climbed marginally to just above 4pc yesterday, well below the 5pc level hit last week.

Bank of England officials have said they will accept offers based on their “attractiveness...relative to market yields”, meaning they are under no obligation to buy what is offered for sale each day.

The Bank has also begun to ask dealers to identify whether offers to sell bonds were made by clients or the banks themselves “in order to ensure the backstop objective of the tool is delivered”. It comes amid concerns that hedge funds may be trying to exploit the bailout scheme for profit.

“It may well be that the Bank wants to collect this information to ensure that its support for the market is working as intended and that it’s not supporting speculators to make a profit,” said Ben Gold, the head of investment at XPS Pensions Group. In further signs that market tension is easing, the cost of servicing shorter-dated UK debt continued to fall as the value of the pound strengthened.

Yields on 10-year gilts fell to 3.9pc yesterday, marking a 0.6 point drop from the peak a week earlier.

The pound also surged to a two-week high, reaching levels of 1.1487 against the dollar towards the end of yesterday

The head of the UK Debt Management Office said bond markets should comfortably be able to absorb the extra £62bn of debt from the mini-budget.

Robert Stheeman, who oversees Britain’s £2.1trillion government bond market, told Reuters: “I am confident that it can be digested reasonably smoothly”.

Mr Kwarteng’s mini-budget prompted the UK DMO to increase this year’s fiscal financing target by £72bn, of which £62bn would be funded by borrowing.

Share prices of Britain’s pension giants fell sharply in the wake of the bond market chaos but rallied yesterday after L&G said it had “no balance sheet exposure” to the sharp moves.

Gilt yields fueled a crisis in liabilitydriven investment products, which the likes of L&G sell.

L&G’S investment management arm holds a 42pc share of the LDI market in Britain, with £387bn of its assets under management related to LDI funds.