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UK bonds take a hit

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The UK’s bonds resumed a selloff Tuesday as the Bank of England denial  a report it will delay planned sales of gilts.

Ten-year yields jumped as much as 12 basis points after the news to trade above 4% again, following a sharp drop on Monday when the government reversed fiscal plans that had battered the market. With the BOE saying a Financial Times report it would push back sales was inaccurate, traders are worrying about a flood of debt from both the central bank and government.

It’s the latest blow to a market that has seen high volatility and sharp swings in recent weeks. Investors have been expecting the BOE to postpone its so-called quantitative tightening given market sentiment is still fragile, and it’s still possible officials may delay again.

“It’s too early to say whether the BOE will be in a position to start selling gilts on Oct. 31,” said Peter McCallum, a rates strategist at Mizuho International. “But the BOE may still judge that conditions are not yet appropriate to start active sales.”

The central bank has amassed a £800 billion-plus ($900 billion) portfolio of gilts following years of purchases since the credit crisis and pandemic. It’s planning to sell those bonds back to the market to speed up the reduction of its balance sheet, part of efforts to tighten financial conditions and bring inflation back under control.

The pace of planned sales is slow, at just £10 billion per quarter. Still, policy makers will be fearful of triggering yet another selloff in the bond market, particularly given sovereign issuance is set to rise sharply even after the near-total reversal of the government’s unfunded tax cuts.

That U-Turn “doesn’t change the bigger picture of a sharply rising issuance burden on the private market as QE transitions to QT,” Citigroup Inc. strategists including Jamie Searle wrote in a note. Following Monday’s government reset, the US bank revised its gilt issuance forecast for the next fiscal year to £263 billion from £306 billion.

The central bank had scheduled starting the gilt sales in early October but was forced to push that back to the end of this month due to the market volatility, with forced selling by pension funds facing margin calls. It said in a statement Monday that it intends to resume sales of corporate bonds in the week beginning Oct. 24.

“It’s part of a well defined pattern of being reactive to financial stability, rather than proactive,” said Antoine Bouvet, rates strategist at ING Groep NV, commenting on the BOE’s denial of the FT report. “In other words, they’re waiting for the crisis to materialize to intervene.”

© 2022 Bloomberg L.P.

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