BANK of England (BOE) officials said the UK bond sell-off that followed last week’s budget announcement was exacerbated by investor positioning, a signal they believe the worst of the slide is over.
The market was positioned for short-end rates to fall and unwound those trades after the government unveiled its fiscal plans, governor Andrew Bailey told reporters at a press conference following Thursday’s (Nov 7) monetary policy decision. That dynamic is “probably finished now,” he said.
Bailey later said that he briefed Chancellor Rachel Reeves of a potential market reaction ahead of her announcement of plans to run up borrowing and boost investments. He said that the investor wobble that followed “was not surprising”.
“There was some closing out of positions in sterling,” Bailey said. “But if you look at the market today it’s pretty settled.”
UK bonds tumbled last week, with the yield on two-year notes rising more than 25 basis points, as traders worried the government’s increased spending in the coming years will fan inflation and limit the BOE’s ability to ease monetary policy.
Last week, Bloomberg reported that the sell-off in front-end bonds deepened as investors were stopped out of trades that would benefit from a steeper yield curve. Strategies for gilts to outperform other bond markets were also unwound.
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Bailey, who along with the Monetary Policy Committee decided to cut rates by a quarter point on Thursday, said the sell-off was made worse by stop-loss orders being triggered. He added that there was a reluctance in the market to take on active positions while the outcome of the US presidential election was unknown.
Still, the moves were far more orderly than the reaction to former prime minister Liz Truss’s fiscal plans in 2022, which triggered a rout in long bonds exacerbated by leveraged pension fund strategies.
“We are tracking the gilt market,” BOE deputy governor Dave Ramsden said. “We work closely with the Debt Management Office but we are not seeing anything unusual at all at the moment.”
On Thursday, 10-year gilts were on course for the first gain this week. The yield fell six basis points to 4.51 per cent. The pound also got a boost, rallying as much as 1 per cent to above US$1.30 amid a broadly weaker US dollar. BLOOMBERG
