Government bonds and pound rally amid pressure for mini-budget U-turn

The pound made gains on Thursday as the Bank of England’s bond-buying plan neared its deadline.

13 October 2022

UK government bonds and the pound rallied amid speculation that Liz Truss’s Government could be forced to U-turn on its unfunded tax cut plans.

Pressure on gilts, UK government bonds, also eased as the Bank of England sought to steady market sentiment by heavily increasing its bond-buying activity ahead of a Friday deadline.

It came after Foreign Secretary James Cleverly declined to rule out further U-turns – while insisting the Government will “absolutely stick” with its tax-cutting principles.

However, the Prime Minister’s official spokesman made clear there will be no further changes.

Conservative Party Conference 2022
Chancellor Kwasi Kwarteng is in the US meeting the IMF (Stefan Rousseau/PA)

“The position has not changed,” the spokesman said.

Chancellor Kwasi Kwarteng, who has been in the US meeting the International Monetary Fund, is now under pressure to reinstate a planned increase in corporation tax from April.

Nevertheless, the yield of UK 30-year gilts dropped by around 0.3 percentage points to 4.5% as the market calmed slightly on Thursday.

Yields, which rise as prices fall, had surged as high as 5.1% on Wednesday, matching the levels which led to the Bank’s initial intervention after the market was shaken by the mini-budget announcement.

Officials stepped in two weeks ago after Mr Kwarteng’s mini-budget sent markets into chaos amid concerns over higher borrowing costs.

The Bank launched a bond-buying programme, for up to £65 billion of long-term gilts, which will stop completely on Friday.

As part of the programme, the Bank bought around £4.35 billion of bonds on Wednesday in an increased effort to help soothe the markets.

Investors had previously been shaken by governor Andrew Bailey’s firm message on Tuesday that the central bank would not extend the plan beyond the end of this week.

The pound also increased by 0.9% to 1.117 against the US dollar.

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