Crisis sees gilt yields rocket to a 20-year high as Bank of England makes biggest intervention in markets yet
Gilt yields continued to surge as the Bank of England made its biggest intervention in markets yet.
The yield on 20 and 30-year gilts – essentially the interest rate which investors demand for lending to the Government – surged to 5.2 per cent and 5.1 per cent respectively, the highest since 2002.
The spiralling cost of borrowing came amid continued turmoil in the gilt market, prompted by the Chancellor’s mini-Budget which spooked investors last month.
Borrowing costs: The yield on 20- and 30-year gilts – essentially the interest rate which investors demand for lending to the Government – surged to 5.2% and 5.1% respectively
Traders have been selling gilts ever since, amid worries that government borrowing will soar, causing an ‘unprecedented’ fall in their price and a spike in yields.
As this punched a hole in pension funds which were heavily exposed to gilts, the Bank had to step in by promising to buy up to £5billion of gilts every weekday for 13 days.
Before yesterday it had spent less than £10billion of its £65billion limit.
But now demand is ramping up as pension funds rush to rebalance their portfolios before the bailout ends tomorrow.
Yesterday, the Bank bought £4.4billion of gilts from investors, taking the total above £11billion.
It intervened to rescue liability-driven investment (LDI) funds with vast amounts of gilts.
When bond prices fell, LDI funds didn’t have the cash available to meet bankers’ demands to cover their collateral.
The Bank launched its bailout to give LDI managers time to rebalance. If it had not intervened, it says many funds could have seen their value written down to zero, leaving millions of pension funds nursing losses.