Speculation over potential BofE extension continues

Speculation over the potential impact of the end of the Bank of England’s (BofE) gilt market interventions has continued ahead of today's (14 October) deadline, with some suggestions that the central bank may extend its support in some form.

The BofE previously confirmed plans for temporary and targeted purchases in the gilt market in an effort to prevent a "self-reinforcing spiral", after gilt yields surged following the Chancellor's mini-Budget.

Further support has also since been announced, with the scope of its daily gilt purchase operations to include index-linked gilts, although BofE Governor, Andrew Bailey, confirmed earlier this week that the Bank would not be extending the operation past this.

However, deVere group CEO and founder, Nigel Green, stated that “despite assertions from the Bank of England to the contrary, we expect that the UK’s central bank will extend in some form its bond-buying support beyond Friday’s self-imposed deadline”.

“It will likely be called something other than an ‘extension’, but we expect that support will not be removed,” he continued.

“In the midst of such market upheaval, the Bank can’t change path now. Gilt markets are a cornerstone of the financial system and a major pillar upon which pensions, insurance, amongst other funds, rely.”

Adding to this, Hymans Robertson head of capital market, Chris Arcari, acknowledged that the further support from the BofE cannot be ruled out given their mandate for financial stability, clarifying however, that “the underlying technical picture is not a positive one”.

He continued: “Should the BofE step away from the market today as suggested, we could see gilt yields rising, and the feedback loop of selling of gilts, as pensions schemes struggle to maintain hedges, re-assert itself.

“To some extent, gilt yields, real and nominal, have repriced to reflect recent fundamental developments, but they have also faced intense technical headwinds, increasing volatility and placing further upwards pressure on yields.

“Fiscal announcements could influence yields in either way, depending on the markets view of their credibility

“Indeed, yields are potentially even above the levels implied by longer-term economic fundamentals, assuming the BofE’s mandate remains intact and the government’s real GDP growth target of 2.5 per cent year-on-year proves to be extremely optimistic, as most economists suggest."

However, Arcari suggested that a shift away from the "ultra-loose monetary, and tight fiscal, policy that characterised much of the post-GFC era may mean the normalisation of yields we have always assumed over the longer-term has been accelerated".

He stated: “Assuming inflation does return to target over the medium-term, in line with consensus forecasts, both nominal and real yields may ease back. Due to recent moves in real yields, and allowing for high current inflation and RPI/CPI reform in 2030, implied inflation does not look particularly expensive.

“The technical headwinds noted above include a large increase in gilt issuance, given the UK’s sharply deteriorating fiscal position, concerns over near-term inflationary pressures, and potential gilt sales by the BofE (currently postponed to 31st October).

“Furthermore, pension schemes have been forced to liquidate collateral, and in some cases, reduce hedging levels, increasing the supply of gilts to the market even further.”

Industry experts have previously raised concerns that the BofE measures could end too soon, with the Pensions and Lifetime Savings Association (PLSA) suggesting that it should be extended to the next fiscal event on 31 October and possibly beyond.

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