After news broke that the Bank of England had told bankers it would extend its bond-buying program past a deadline on Friday if market conditions called for it, the British pound gained ground in Wednesday's Asian trade.
After falling overnight, the pound gained 0.3% to trade at 1.0991, momentarily crossing the 1.1 threshold.
Citing insiders with knowledge of the situation, the Financial Times claimed that the central bank secretly informed bankers that it might extend the deadline for its emergency bond-buying program.
The revelation is in contrast to Governor Andrew Bailey's October 14 deadline, who on Tuesday gave pension funds three days to address their problems.
Markets were concerned that the removal of debt assistance might add additional stress to fund managers already under duress from a significant sell-off in gilts, which is what caused Bailey's warning to send the pound tumbling to a near two-week low on Tuesday.
As of Tuesday's end, the 10-year UK bond yield was up 0.8% at 4.4750.
According to the Financial Times, BoE officials are keeping an eye on investment managers that assist pension funds in managing the risks in their portfolios to see if they have amassed sufficient cash reserves to enable their customers to pay margin calls. If the bank determines that the fund managers are unable to achieve this criteria, it will extend support.
Concerns over proposed tax cuts announced by recently recruited Finance Minister Kwasi Kwarteng were the catalyst for the UK's impending debt crisis. Given that the government is already battling high inflation and stretched spending caused by the COVID-19 outbreak, investors questioned if the government had enough fiscal space to finance stated tax cuts.
The pound hit a record low last month as a result of widespread gilt selling sparked by news of the proposed tax cuts, which also drove yields to all-time highs. In order to stabilize bond prices, the BoE was compelled to interfere in the markets with a 65 billion pound program. The action contrasts with recent bank efforts to rein in rogue inflation by tightening monetary policy.
Markets are currently anticipating GDP data from the UK later in the day for additional hints on the state of the nation's economy.
0 Comments