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UK gilt yields rise after plunging on BoE action

FILE PHOTO: Illustration shows British pound banknotes

LONDON (Reuters) - Yields on British government bonds rose moderately on Thursday, a day after they plunged when the Bank of England said it would temporarily buy long-dated debt in a bid to quell a gilts sell-off that threatened the country's pension funds.

Thirty-year gilt yields, which surged to a 20-year high above 5% on Wednesday before dropping by more than 100 basis points after the BoE intervention, were up about 2 basis points at 3.96% at 0904 GMT.

Twenty-year gilt yields rose about 6 basis points (bps) to 4.20%, having earlier hit a high of 4.309%, also reversing only a small part of their fall on Wednesday.

Shorter-dated gilt yields rose more strongly with two-year yields adding about 13 bps to 4.38%, having risen as high as 4.48%, though they remained well below a post-2008 peak of 4.761% hit on Tuesday.

Two-year yields had earlier in the day risen further above than those for 10-year gilts - which were up 12 bps at 4.13% - steepening the inversion of the 2/10 yield curve, which is sometimes seen as an indicator of recession.

Theo Chapsalis, head of UK rates strategy at Morgan Stanley, forecast on Thursday that the BoE action would help 10-year yields stabilise at a level below 4.1%.

But he warned of a continued "bumpy ride" ahead, as volatility had exceeded levels seen in March 2020, when the BoE restarted its quantitative easing programme, in part to tackle bond market turbulence caused by the COVID-19 pandemic.

"The scale of purchases will define whether any technical selling - margin calls and index tracking - can be offset," he wrote in a note to clients.

The BoE has said it intends to buy up to 5 billion pounds ($5.40 billion) a day of gilts with a maturity of at least 20 years at daily reverse auctions up until Oct. 14.

At its first auction on Wednesday, it accepted offers of 1.025 billion pounds of gilts out of 2.587 billion pounds of offers submitted.

($1 = 0.9258 pounds)

(Writing by William Schomberg; Editing by David Goodman and David Milliken)