Bank of England

The Bank of England today widened its gilt market intervention to counter what it says is a “material risk to UK financial stability”. The BoE will now include index-linked gilts in the basket of assets it purchases as part of the intervention launched in the wake of the Chancellor’s mini-Budget.  “The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the bank warned. Ouch...at to think it’s all to do with dollar strength and absolutely nothing to do with a gung-ho Chancellor blowing a hole in the UK’s fiscal credibility…

Gilts nervous

It comes after another selloff in UK debt markets, particularly in the index-linked market. And it comes only a day after the Bank said it would double the size of the daily envelope from £5bn to £10bn and launched a new short-term facility to backstop markets – this move seems to have been ignored by the market as the 30-yr hit 4.8%. There was even more damage done in the index-linked market – today sees a £900m auction of linkers that the Bank is clearly worried about.

Chancellor brings forward debt plan

Meanwhile, the Chancellor is bringing forward OBR forecasts and details of his debt-cutting plan to October 31st...cue plenty of Halloween horror show puns for headline writers and commentators alike. The truth is markets have already been spooked – the task in three weeks is to restore calm. Bringing it forward to before the next Bank of England decision is sensible. It will be a very important event for the gilt market in particular – as we have discussed - and the Bank could do with knowing what the Chancellor is up to before it decides on just how much it needs to raise rates. A credible plan from the Chancellor would do a lot to assuage worries in the bond market and could help push yields back down.

Markets

Sterling trades pretty steady at $1.10 this morning without too much fallout from the gilt market shenanigans. EURUSD is holding 0.97. Stocks fell on Wall Street yesterday with the Nasdaq Composite dropping to lowest in two years. S&P 500 futures are testing last week’s lows this morning. The FTSE 100 trades about three-quarters of a percent lower around 6,900.