BoE widens gilt purchase operations to include index-linked gilts – reaction from advisers, investment and wealth managers

by | Oct 11, 2022

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This morning, the Bank of England has announced that it will widen the scope of its daily gilt purchase operations to include purchases of index-linked gilts, as it warned of a “material risk to UK financial stability”. Wealth managers, investment experts and advisers have been busy digesting the implications of the Bank’s latest statement as they comment here:

Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management: “Index-linked gilts had a very bad day on Monday, with yields rising by 64bps. The 30-year was down 16 percent on the day. These are illiquid bonds and just a few sellers can send prices crashing. The Bank of England has therefore been forced to include these in its bond buying programme. More generally, the Bank’s intervention hasn’t really worked in stabilising the bond market after the loss of confidence following the government’s mini-Budget. Weak international markets haven’t helped, either. Unfortunately this is having a real impact on mortgage rates, the economy and people’s lives. The mini-Budget has triggered a phenomenal amount of uncertainty in markets.”

Richard Carter, head of fixed interest research at Quilter Cheviot believes that we are in “unprecedented territory” as he comments: “This morning the Bank of England has once again felt the need to intervene in the fixed income market following yesterday’s announcement as it seeks to calm nerves and return stability to government bond markets. We are in somewhat unprecedented territory here and as a result yields continue to climb higher as investor fears are yet to be eased.

“The move by the BoE today to include index-linked gilts in their emergency quantitative easing programme is probably sensible given the massive rise in yields that occurred yesterday, however, it is going to be an incredibly difficult balancing act at a time when the Bank wants to be raising interest rates in order to bring inflation down. It is stuck between a rock and the hard place in combatting inflation at the same time as fiscal policy causes shockwaves in markets. As a result, we expect gilt markets to remain volatile ahead of the Chancellor’s fiscal plan speech at the end of the month and potentially beyond as it remains to be seen how effective the government’s growth plan will be.”

Wes Wilkes, CEO at wealth managers IronMarket: “I question whether this latest action from the Bank of England will have any effect and it’s arguably naive to believe that we will see an orderly end to its gilt purchase scheme. That said, Threadneedle Street has been put in an extremely difficult position by the Government’s policy messaging and whilst, ordinarily, a back-stop buyer feels supportive, this time it just feels desperate. Also, what stops the selling resuming once the back-stop is removed? The whole situation is a farce.”

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “The response of the Bank of England underlines its flexibility when it comes to intervening in the bond market, which is good news. The not-so-good news is that it also shows how volatile the market is and the apocalyptic impact the Government’s ill-thought out mini-Budget and unfunded spending have had on gilts. It also highlights the dangers of using derivatives in cautious markets, and begs the question what the FCA and PRA were doing to allow such financial weapons of mass destruction to be used on workers pension schemes.”

Riz Malik, director of Southend-on-Sea-based R3 Mortgages: “On Monday, it was announced that the long-awaited fiscal plan and OBR report were going to be shared on 31st October rather than 23 November. However, this has done little to cool the Uk bond market. Trust and confidence need to be restored in UK Plc and the wording from the Bank of England highlights the severity of the situation. No central bank would use the term “material risk to stability” lightly. Volatility is likely to continue until 31st October when deep cuts are expected to balance the books and go towards repairing the damage caused in the past few weeks. The first few weeks of the new administration have been nothing short of a disaster in terms of the impact on markets.”

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