Relief rally in UK and US markets after Bank of England ‘calm down’

Investors rushed into US stocks and government bonds on Wednesday after UK assets rose sharply after the Bank of England intervened to calm the turmoil in the gilt market.

The central bank announced on Wednesday that it would buy long-dated gilts in light of the recent “significant re-rating” of UK government bonds. “Should the dysfunction in this market persist or worsen, there would be a significant risk to UK financial stability,” the BoE said.

30-year gilt yields, which hit a 20-year high of more than 5 percent earlier Wednesday, fell to 3.94 percent. Long-dated bonds saw the sharpest drop in yields in a single day on record, according to Tradeweb data. The yield on 10-year UK debt fell to 4.01% from 4.59%. Yields fall as investors buy the bonds, pushing prices higher.

The rebound in UK bonds bolstered the US 10-year Treasury bond, whose yield fell 0.24 percentage point to 3.73 percent as investors bought the notes. Earlier Wednesday, yields rose above 4 percent for the first time since 2010.

The blue-chip S&P 500 ended the day up 2 percent, ending a six-day losing streak. The US benchmark hit its lowest intraday level since November 2020 on Tuesday amid investor concerns about the pace of rate hikes to fight inflation and the impact of UK fiscal and monetary policies on global economic growth. The tech-heavy Nasdaq Composite rose 2.1 percent.

The BoE’s move was the “reassurance the market has been waiting for,” said Daniela Russell, head of UK rates strategy at HSBC.

“The announcement that it will suspend its program of selling gilts and buying long-dated bonds is a huge relief for the market and we are seeing that as yields come down and the curve flattens,” she said.

Since Chancellor Kwasi Kwarteng unveiled his plan for unfunded tax cuts worth £45 billion last Friday,

Sterling rose 1.4 percent to $1.09 after BoE intervention on Wednesday, but analysts warned the relief was likely to be short-lived.

Adam Cole, head of FX strategy at RBC Capital Markets, said the BoE’s actions were seen as “something to address specific problems in the gilt market in the near term”.

“The underlying issues that drove the pound lower — the worsening deficits and the apparent dominance of ideology over economics in fiscal policy — have not changed,” he said.

UK stocks rallied after central bank move. The FTSE 100 closed 0.3 percent higher but was down 1.9 percent at the start of the session.

The BoE said asset purchases would start on Wednesday. The bank’s plan to reduce its balance sheet by selling gilts in its portfolio, which was due to start next week, has now been delayed by a month.

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