The pound continues to lurch lower and is now worth $1.0549, a 1.7% drop on the day. On Monday, it hit an all-time low of $1.0327 against the dollar.
Donald Phillips, co-head of the Liontrust Global Fixed Income Team, said: “Clearly there has been a vertical climb in UK government bond yields and the opposite in the value of the pound since UK Chancellor Kwasi Kwarteng’s (not so) mini budget last week.
“The impacts of this run were being felt acutely across financial markets. Today, the Bank of England announced a “strictly time limited” buying program to shore up the market in longer-dated bonds, designed, we assume, in particular to stop the damage being done to pensions by the violent increase in long-dated bond yields. The Bank has also announced a postponement in bond sales until the end of October, designed to help improve the balance in the UK government debt market.
“This is a welcome piece of news in the short term, preventing for now a run on the gilt market. Ultimately, whilst inflation remains a problem, quantitative easing (QE), is unlikely to be anything other than a very short-term fix. Indeed, the Bank is clear that quantitative tightening (QT) will recommence at the end of October.
“We hope this is buying the UK government time to address the flaws in their profligate fiscal policies, affording them some room to bring to parliament a plan based on the reality of the economy we have. Failure to address their fiscal plan, we believe, will likely lead to more pain in government bonds down the line.”
The dollar has strengthened against all major currencies and hit a 20-year high today, as it is regarded as a safer investment in turbulent times, and the US central bank has raised interest rates aggressively, giving investors a better return on their assets.
By comparison, the euro is down 0.38% against the dollar.