UK gilts reverse historic losses as BoE begins record buy-back

British government bond prices surged on Friday, reversing historic losses made earlier this week, after the Bank of England began to buy 200 billion pounds ($236 billion) of assets to support the economy through the coronavirus crisis.
Thirty-year gilt yields dropped more than 25 basis points on the day to 0.92%, representing the biggest one-day price gain since the BoE first began quantitative easing in March 2009, down from a nine-month high of 1.536% on Thursday.
Before the BoE took emergency action on Thursday, gilt prices were plummeting - on track for their biggest declines since the 1998 emerging market debt crisis - in what Governor Andrew Bailey said were becoming "disorderly" market conditions.
Gilts rallied strongly after the BoE announcement on Thursday and again early on Friday, and made further gains after investors did not swamp the BoE with offers to sell at its first reverse auction for 1.7 billion pounds of short-dated gilts.
In total, the BoE bought 5.1 billion pounds of gilts on Friday, and announced it aimed to buy 14.1 billion pounds worth next week, in what is both its largest and its most rapid quantitative easing programme.
"Two hundred billion pounds of QE is a welcome relief for the gilt market," Citi fixed income strategist Jamie Searle told clients. "The initial pace or purchases will be very large ... Expect gilts to rally further near-term."
The BoE was likely to end up owning 45% of the gilt market, he estimated. Two-year gilt yields briefly dipped below zero, coming close to record lows set on March 9, and at 1318 GMT were at 0.09%, close to the BoE's new Bank Rate of 0.1%.
And benchmark 10-year gilts dropped almost 20 basis points to 0.53%, after hitting a nine-month high of 1.058% on Thursday, when the swing in yields over the day was the sharpest since the BoE launched its first QE programme in 2009.
Gilt yield spreads over Bunds tightened to near their narrowest since late 2018, after briefly touching a post-Brexit referendum high on Thursday. Sterling was also stronger against the US dollar, suggesting the flow out of British assets has slowed.
Separately, the United Kingdom Debt Management Office confirmed a full schedule of bond auctions for the next three months, including the launch of new three-year, five-year and 10-year gilts and a long-dated gilt syndication. Investor demand for gilts remained solid at DMO auctions this week, despite the market turmoil, but the DMO had to accept some lower bids than normal to sell all it wanted to.
The DMO said it would publish updated borrowing plans for the 2020/2021 financial year which will take account of extra government spending to combat the coronavirus.
Finance minister Rishi Sunak announced 330 billion pounds of loan guarantees and 20 billion pounds of help for business on Tuesday, and is due to announce late on Friday more measures to keep workers in jobs during the crisis.