Pound rallies from 2-week low amid mixed signals about whether the Bank of England's ready to keep buying bonds

Bank of England governor Andrew Bailey
Bank of England Governor Andrew Bailey.Dan Kitwood/Getty Images
  • The pound rose amid confusion about when the Bank of England will halt its emergency bond buying.

  • The FT reported the program might be extended, but the UK central bank said nothing had changed.

  • Sterling fell Tuesday after the BoE's chief told pension funds they had 3 days to sort out their investments.

The British pound rebounded Wednesday from a sharp drop against the dollar, which was driven by a Bank of England warning that the troubled bond market had three days to act before its support would end.

Sterling was up 0.8% to $1.1056 at last check as investors assessed mixed signals on whether the BoE would stick with its plan to buy UK government bonds (gilts) to calm volatile markets.

It was pulling back slightly from higher levels hit after a report in the Financial Times early Wednesday suggested a change of heart by the UK central bank on timing. It said the BoE had signaled privately to several bankers that it could extend its emergency bond-buying program beyond its planned end on Friday.

But the BoE then pushed back to stress that its plans had not changed.

"As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October," it said in a statement posted to Twitter. "The Governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior levels.

"Beyond 14 October, a number of facilities, including the new TECRF, are in place to ease liquidity pressures on LDIs."

The BoE launched its emergency program two weeks ago after a massive sovereign debt selloff sparked by fears a financial crisis could damage pension fund investments.

On Tuesday, the pound dropped to $1.0954, a two-week low against the dollar, after comments by BoE Governor Andrew Bailey at an Institute of International Finance event in Washington.

He made it plain to pension funds and other investors in UK government bonds that the program would end as scheduled, despite their calls for it to be extended. That sent a message for them to sort out their liquidity positions fast, analysts said.

"We have announced that we will be out by the end of this week. We think the rebalancing must be done," Bailey said, per Reuters.

"My message to the funds involved and all the firms involved managing those funds: You've got three days left now. You've got to get this done."

The comments sent new jitters through the market, according to analysts.

"A Central Bank has just left a market to malfunction, when it was the main cause!!" Crossborder Capital said in a Twitter post.

The BoE was forced to intervene in late September with a £65 billion ($71.5 billion) program of buying long-dated UK government bonds, or gilts. The move came after the UK government's announcement of huge tax cuts spread turmoil in currency and bond markets as investors fretted about their impact on its debt burden.

The central bank then stepped in twice to widen the program on Monday and Tuesday as its actions showed little sign of settling the gilt market. It warned that surging gilt yields risked spurring a "fire sale" spiral that could threaten the UK's financial stability.

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