Sterling and UK government bonds jumped on Thursday as Liz Truss’s government came under increasing pressure to reverse or modify plans for unfunded tax cuts that have roiled markets.
The gains came a day after the Bank of England calmed market jitters with 4.4 billion pounds of bond purchases as part of an emergency intervention that was due to end on Friday.
Sterling rose 1.5 percent against the dollar to $1.1262, while the 30-year gilt yield fell 0.43 percentage points to 4.46 percent, indicating a sharp rise in prices. The government’s 30-year borrowing costs had soared above 5 percent on Wednesday, close to the level that prompted the BoE to enter markets with an offer to buy up to 65 billion pounds of long-term bonds two years ago weeks.
Pressure is mounting from Tory MPs on Truss to abandon key elements of the September 23 “mini” budget, including scrapping a £17bn corporation tax cut.
One MP said the mood in the party after a meeting of MPs with Truss on Wednesday evening was “awful”. Earlier in the day, the Prime Minister had said she would not make any spending cuts, raising further questions about how the tax cuts would be funded.
Overall, the “mini” budget included £45bn of unfunded tax cuts, although the government has already made a U-turn on £2bn plans to abolish the 45p top rate of personal tax.
“Markets are reacting positively to the possibility of another twist in the budget,” said Athanasios Vamvakidis, currency strategist at Bank of America. “It would show that market discipline worked and the government finally got the message.”
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Earlier, investors had been rattled by central bank governor Andrew Bailey’s confirmation on Tuesday that the BoE’s bond-buying program would not be extended beyond Friday, with the Bank warning pension schemes were in trouble that they only had three days left to sell any assets. they needed to restore their cash reserves.
However, after the central bank bought £4.4bn of bonds on Wednesday, easily the biggest daily volume so far in the BoE’s programme, markets were reassured by signs that pension funds were taking advantage of the facility to download gilts and collect cash.
“This last round [of BoE buying] it shows that people are realizing that it’s better to use the facility quickly because the window is closing,” said James Athey, fund manager at Abrdn. “It also looks like the kind of levels we hit yesterday are a line in the sand where the bank is ready to provide liquidity.”
Short-term bonds also rallied, with the 10-year gilt yield down 0.24 percentage points to 4.19%.
Despite Wednesday’s falls, 30-year bond yields remain well above the level of around 3.8 per cent seen before the ‘mini’ Budget triggered sharp volatility in gold and sterling markets .