Truss mini-budget sparked five worst days on UK debt market on record, Bank of England says

Prime minister Liz Truss’s botched mini-budget triggered the five most volatile days on the UK debt market since records began 22 years ago, the Bank of England said today.

Financial markets were rocked by Truss and her former chancellor Kwasi Kwarteng launching £45bn worth of unfunded tax cuts and raising borrowing to fund a two-year typical energy bill freeze of £2,500 on 23 September.

Sharp movements in the gilt market forced the Bank of England to launch a £65bn emergency bond buying scheme to tame rising rates.

Sir Jon Cunliffe, the Bank’s deputy governor of financial stability, today in a response to a request from the treasury committee to explain why the scheme had been ratcheted up over the course of this month, said more support was necessary to prevent a fire sale dynamic in the pensions sector erupting.

Since the mini-budget was delivered on 23 September, “the five largest daily moves in the 30 year inflation-linked gilt, in data that dates back to 2000,” Cunliffe said.

Indexed linked gilts are instruments that provide a return that rises in line with inflation.

Yield on 30-year gilt has whipsawed since mini-budget

Those moves prompted the Bank to expand a lending scheme to allow liability driven investment (LDI) funds, which pension managers have invested heavily in, “to access sufficient liquidity for a long enough period to facilitate their necessary rebalancing,” he added.

The Bank also expanded the original £65bn backstop to include daily purchases of index linked gilts, which Cunliffe identified as the segment of the debt that came under the toughest selling pressure after the mini-budget.

For months, the Bank has been planning to sell government bonds at the beginning of October to kick off the early stages of winding down its financial crisis and Covid-19 quantitative easing programme, which saw it hoover up over £830bn of debt.

However, market volatility forced the central bank to mothball those plans.

Speculation has grown in recent days over whether the Bank will delay selling bonds, known as quantitative tightening (QT). 

After it announced the temporary gilt market intervention late last month, it said QT would in fact begin on 31 October.

However, the Financial Times reported today Threadneedle Street had decided to delay QT due to recent severe market swings.

The Bank pushed back against that report, but did not completely deny its bond selling campaign had been delayed.

A Bank spokesperson described the FT story as “inaccurate”.

Gilt yields have scaled lower recently after new chancellor Jeremy Hunt scrapped nearly everything in Truss’s mini-budget.

He reversed plans to ditch the six percentage point corporation tax hike and froze the basic rate of income tax at 20 per cent “indefinitely”. The reversals amounted to £32bn of tax rises.