LONDON (Reuters) - The Bank of England halted the sharpest slide in British government bonds since 1998 on Thursday after it cut its interest rate to a record low 0.1% and promised 200 billion pounds ($231 billion) of asset purchases.
British assets have been under heavy selling pressure this week, as concerns about the economic impact of the coronavirus mounted and investors sought the safety of the dollar, pushing sterling to its weakest in 35 years against the U.S. currency.
Before the BoE acted, 10-year gilt yields GB10YT=RR had risen by more than 70 basis points over the past week, with 40 basis points of that move coming in the past two days - the sharpest price fall for British bonds since 1998’s emerging market debt crisis.
BoE Governor Andrew Bailey said disorderly markets - as well as the increasingly severe impact of the coronavirus - were the main reasons policymakers needed to act again, barely a week after slashing rates to 0.25% from 0.75%.
“The (BoE’s) 200 billion pound QE announcement is nearly three times the size of its previous biggest announcement,” noted economist Sam Tombs from Pantheon Macroeconomics consultancy.
Ten-year gilt yields GB10YT=RR, which had risen to their highest since May at 1.058% earlier in the day, closed down 7 basis points at 0.72%, and fell further after market close.
Interest rate sensitive two-year yields fell further, while the effect on 30-year yields GB30YT=RR was more muted, causing the yield curve to steepen.
The intra-day swing in 10-year yields was the biggest since the BoE first launched its asset purchase programme in March 2009, and before the BoE acted, gilts’ spread over German Bunds was the widest since 2016’s Brexit referendum.
Investors said the BoE purchases would help offset a major increase in British government borrowing to cover the damage done by the coronavirus, a prospect weighing on gilt prices.
“We expect that the BoE will focus on purchasing gilts over a short time horizon and therefore gilts should remain well anchored in the coming months,” David Zahn, head of European fixed income at fund manager Franklin Templeton, said.
Chancellor of the Exchequer Rishi Sunak promised 330 billion pounds of loan guarantees and 20 billion pounds of direct extra aid for businesses on Tuesday, on top of higher spending he announced a week earlier.
The BoE will start buying gilts on Friday, with 5.1 billion pounds of purchases planned in three separate operations for gilts of short, medium and long maturities.
“Given prevailing conditions, the Bank intends - at least initially - to make purchases at a materially higher pace than in the recent past,” the BoE said.
Details of more operations will come next week.
Earlier on Thursday, demand from investors remained solid at an auction of 3.25 billion pounds of five-year debt GB5YT=RR, with bids totalling double the amount on offer - stronger than at an auction for the same bond two weeks ago.
However, similar to an auction of 30-year gilts on Tuesday, the DMO had to accept some bids that were well below the average price offered, in order to sell the full amount.
Additional reporting by Dhara Ranasinghe; editing by William Schomberg, Larry King, Alexandra Hudson