UK Gilts Send Markets Spiralling Following Truss Financial Package Announcement

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UK Market Update

The Bank of England (BoE) delivered another 50 basis points (bps) rate hike at September’s Monetary Policy Committee meeting. It also voted unanimously to proceed with quantitative tightening plans by starting its active sale of gilts on 3 October at a pace of £10 billion per quarter. More significantly for the markets, Liz Truss’ government announced a £45 billion unfunded tax-cut package. Together with the BoE’s perceived hawkish tone, the fiscal package triggered an aggressive sell-off in gilts (see Chart of the Month below). This set off an unwinding of many exposures in the liability-driven investment fund space, which led to a mass selling of long-end gilts as pension funds sought to raise cash for their investments within these funds. To prevent several pension funds from collapsing, the BoE announced a £65 billion emergency bond-buying programme (and delayed its quantitative tightening plans) for the long-end gilt market, which eventually quelled volatility.

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