Just last week, we reported that the Bank of England had to start a bond-buying programme to keep the country from an all-out currency run. Liz Truss, the new Prime Minister of the UK, announced that they would be drastically increasing spending in the short term while cutting taxes – especially the taxes on the highest earners. Besides being politically unpopular, the financial world took notice. The “fiscal event”, as Truss’s team put it, was considered by experts to be perhaps one of the most foolish decisions possible.
Because of these decisions, the pound took a pounding, and it was only the Bank of England’s programme that could stop the assault. Last week, once the bond-buying programme was set to end, the financial world took notice and began to panic. The uncertainty around the programme, and whether it would be extended, led to record selloffs of 30-year government bonds. Yields on these bonds usually move in hundredths of a point; instead, they rose by .2% to above 5%. Since yields rise when bond prices decrease, these figures were extremely worrisome for investors. Their concern is that the government is ending their bond-buying too early, before the pound and the underlying problems causing the currency run have been solved.
Mixed Messages
To make matters worse for the Bank of England, The Financial Times reported that the government would be extending the programme. The government quickly denied this assertion, even though to many, it seemed inevitable, which meant that there were mixed signals being sent out into the financial world. One thing investors value more than anything else is stability, and what has been happening lately in England has been anything but.
Pension fund managers are especially aware of anything to do with the bond industry. Government bonds are ideal financial tools for pension funds, since they are normally so stable. As such, they tend to make big moves, and do so slowly. So, when their industry was rocked by rapid sell-offs last month after Truss’s economic plan was announced, it threw everything into a frenzy. Many pension fund managers are still reporting that they have yet to be able to pull all the money out of the funds they desire. As of last Tuesday, the Bank of England had spent 7 billion GBP on bond purchases, although the program has a total of 65 billion available for expenditures.
Because of all these moves, the GBP has continued sliding against the USD, approaching 1.1 GBP:USD. That exchange rate was 1.4 one year ago. Programme or no programme, it is clear that the financial market is undeniably spooked when it comes to Great Britain’s monetary stability.