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U.K. Bonds Tumble After BOE Slows Speed of Stimulus Purchases

U.K. Government Bonds Drop After BOE Disappoints Market Doves

U.K. government bonds slid after the Bank of England’s boost to its quantitative-easing program was offset by a slower pace of purchases.

The longest-dated maturities led the slump, following the 100 billion pounds ($125 billion) increase to the program. The BOE said that it would be completed by the end of the year, meaning its weekly bond buying will be halved.

“Markets were not prepared for the BOE being so explicit about reducing the pace of buybacks so soon,” said strategists at Toronto-Dominion BankTD Securities including Pooja Kumra, in a note. “In the near term gilts could see some repricing as markets adjust to the new pace of QE.”

Money markets moved away from betting on a historic shift to sub-zero rates after the policy announcement. Investors had been pricing in more stimulus from the BOE to help ease financial conditions and support the economy from what may be its worst recession in centuries. They’re now expecting about nine basis points of interest-rate cuts by next summer.

U.K. Bonds Tumble After BOE Slows Speed of Stimulus Purchases

The central bank will now buy back 6.9 billion pounds of bonds a week, down from more than 14 billion previously, eroding a valuable pillar of support for the market. The BOE said it could increase QE again if needed.

Yields on 30-year gilts rose 10 basis points to 0.68% as of 3:40 p.m. in London, their highest level in over two weeks. Shorter maturities showed a more muted rise, causing the gap between five and 30-year gilts rates to widen by the most in three months.

The pound initially pared a drop on the announcement, before slumping as much as 1.1% against a strengthening dollar. Currencies have counter-intuitively tended to rise on increased central bank stimulus in recent months, as it is seen as supportive of economic recovery. TD Securities said it also expected the pound to start underperforming peers.

BOE policy makers voted unanimously to hold rates at 0.1%, and 8-1 in favor of boosting bond buying. Their stimulus so far has helped sterling bounce back from a 35-year low against the dollar in March, when the coronavirus forced lockdowns, but the outlook for the U.K. economy remains bleak.

“The speculation they would err on the side of doing more rather than less were clearly dashed,” said John Wraith, head of U.K. and European rates strategy at UBS Group AG.

U.K. Bonds Tumble After BOE Slows Speed of Stimulus Purchases

©2020 Bloomberg L.P.