Gilts rally as Bank of England bond purchases stabilize market

A rally in UK government bonds gained momentum on Thursday as yields fell further on signs the Bank of England’s asset purchases might be stepped up in its final days.

The 30-year gilt yield fell 0.32 percentage points to 4.57 percent, signaling a sharp rise in prices. It was up over 5 percent on Wednesday, close to the level that prompted the BoE to enter the markets two weeks ago with an offer to buy up to £65 billion of long-term gilts.

Investors were unnerved by Tuesday’s confirmation from the bank’s governor, Andrew Bailey, that the purchase program would not be extended beyond Friday, as the BoE warned struggling pension systems they had just three days to buy all assets to sell the ones they needed to restore their cash buffer.

After the central bank bought £4.4 billion worth of bonds on Wednesday – by far the largest daily volume on the BoE’s program to date – markets were reassured by signs pension funds were seizing the opportunity to dump gilts and raise cash.

“That last lap [of BoE buying] shows that people are realizing they had better use the facility quickly because the window is closing,” said James Athey, fund manager at Abrdn. “It also seems like the kind of levels we hit yesterday are a line in the sand where the bank is ready to provide liquidity.”

Short-dated bonds also rallied, with the 10-year gilt yield falling 0.19 percentage point to 4.23 percent. The pound rose 0.2 percent against the dollar to $1.113.

Despite Wednesday’s declines, 30-year bond yields remain well above levels of around 3.8 per cent, which caused acute volatility in the gilt market and before Chancellor Kwasi Kwarteng’s £43 billion package of unfunded tax cuts last month in sterling.

Prime Minister Liz Truss is facing mounting pressure from her party to rewrite the “mini” budget, but she told Tory MPs on Wednesday she would stick to tax cut plans and balance the books with no cuts in public spending.