UK gilts surge on speculation about mini-budget U-turn

By David Milliken

LONDON (Reuters) -British government bond prices rose strongly on Thursday after reports that Prime Minister Liz Truss’s government was considering a U-turn on some of the measures in its late-September “mini-budget” that triggered a historic gilts slump.

Yields on 30-year gilts, which have borne the brunt of the sell-off that forced the BoE to intervene in the gilt market, were 33 basis points (bps) lower at 4.56% but remained around 80 bps higher than before the mini-budget.

On Wednesday the 30-year yield hit a 20-year high of 5.10%, according to Refinitiv data, and 30-year gilts are now on course for their biggest daily price gain since the BoE launched its support programme on Sept. 28.

Sky News cited sources as saying discussions were under way over whether to scrap parts of the mini-budget – which includes 43 billion pounds ($48 billion) of unfunded tax cuts – and the Sun newspaper said Truss was now considering raising corporation tax.

However, when asked about the reports, finance minister Kwasi Kwarteng said the government’s position had not changed and that he remained focused on delivering the mini-budget and boosting growth.

“It’s all well and good for the market to rally on headlines of a U-turn. But we need to see what’s actually included in this before we can make a better assessment of where we’re going,” said Megum Muhic, senior associate strategist at RBC.

Two-year gilt yields at one point fell back to levels not seen since Sept. 23 — the day of the mini-budget — at 3.669%, down as much as 34 bps on the day, and at 1500 GMT they were 17 bps lower at 3.84%.

Short-dated gilts stand to benefit if the government scales back fiscal stimulus and relieves pressure on the Bank of England to rapidly raise interest rates.

Interest rate swaps priced in a 50% chance that the BoE would raise rates by 75 bps to 3% at its Nov. 3 policy announcement. Earlier pricing had suggested a 100 bps increase was fully priced in.

“This was always about the market repricing the BoE’s policy path, and if the BoE’s task is made easier, then definitely that’s a big support for gilts and that’s the rally we are seeing today,” UBS’s head of rates strategy, Rohan Khanna, said.

Gilts have also been supported by faster purchases by the BoE as it nears the end of its temporary purchase programme, which finishes on Friday.

The central bank bought 3.12 billion pounds of index-linked debt at its reverse auction on Thursday – the most at any reverse auction since the programme started on Sept. 28.

A further 1.56 billion pounds of long-dated gilt purchases took its total purchases so far to 17.9 billion pounds.

Governor Andrew Bailey has stated publicly that there will be no extension of the bond purchases programme, but some market participants think further assistance will be needed.

“If these reports of a (government) U-turn are true, it will probably take some pressure off the Bank of England,” Muhic said. “But we will only really find out when the market reacts on Monday.”

RBC said one option for the BoE if it did need to provide further support would be for it to fund purchases of long-dated gilts with sales of shorter maturities, thus avoiding increasing the size of its balance sheet and creating unwanted stimulus.

($1 = 0.8943 pounds)

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