Government bonds and pound rebound amid bond-buying deadline

Trading sentiment continued to improve amid speculation that Chancellor Kwasi Kwarteng could be forced to U-turn on tax cut plans.

14 October 2022

Government bonds and the pound have steadied at the start of London trading as the Bank of England’s bond-buying programme draws to a close.

Trading sentiment continued to improve amid speculation that Chancellor Kwasi Kwarteng could be forced to U-turn on part of the Government’s mini-budget announcement.

It comes amid pressure to reverse plans to scrap the planned increase in corporation tax from 19% to 25%.

The Chancellor’s unfunded tax-cutting plans in the mini-budget last month led to a surge in yields on gilts, UK Government bonds, amid a sell-off due to scepticism from large swathes of the markets.

Conservative Party Conference 2022
Chancellor of the Exchequer Kwasi Kwarteng (Aaron Chown/PA)

This pressure caused the Bank of England to step in to calm the gilt markets by promising to buy up to £65 billion in gilts from those who want to sell them.

Pressure to gilts returned on Tuesday after traders were spooked by Bank of England governor Andrew Bailey’s firm message that the central bank’s bond-buying scheme would not be extended beyond Friday.

However an increase in gilt purchases by the Bank of England towards the end of this week and rumours regarding Government policy reversals have helped prices recover.

On the opening of the markets, yields on UK 30-year gilts fell back by 3.6% to 4.38%, while 10-year gilt yields moved 5.9% lower to 3.93%.

Meanwhile, the pound was 0.6% higher at 1.131 against the US dollar as trading sentiment improved.

The FTSE 100 also jumped roughly 1% as market confidence improved, helping to support banking and housing stocks.

The Bank of England bought around £4.7 billion of gilts on Thursday in an increased effort to help soothe the markets, and it is expected to continue with further purchases on Friday.

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