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U.K. bond yields slip ahead of Friday’s deadline by Bank of England to withdraw support

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The British bond market saw a moment of calm in early action on Thursday, one day ahead of a Bank of England’s self-imposed deadline to stop its support of the market.

The yield on the 30-year gilt
TMBMKGB-30Y,
4.537%

fell 16 basis points to 4.65%, though it’s still about 30 basis points on the week.

The yield on the 10-year gilt
TMBMKGB-10Y,
4.237%

fell 9 basis points to 4.33%.

Yields move in the opposite direction to prices.

The central bank’s purchases of gilts are focused on the longer end of the maturity spectrum, to help pension funds unwind their strategies that ended up being leveraged bets on U.K. bonds.

Through Wednesday, the central bank has bought £8.76 billion of bonds during the two week program. It can buy up to £10 billion per day.

Bank of England Governor Andrew Bailey told pension funds they need to finish rebalancing their positions this week, even as the pension fund industry has asked for the central bank to keep support in place until the end of the month. The Bank of England said there’s over £1 trillion invested in liability-driven investment, or LDI, strategies.

Dhaval Joshi, a strategist at BCA Research, noted the paradox that the surge in interest rates has helped reduce the number of U.K. pension funds in deficit in half, to 20%.

“The issue was liquidity, the inability of pension schemes to transfer capital to overleveraged LDI funds quickly enough,” he said. “Without the BoE’s intervention, this would have driven yields even higher, forcing further gilt sales, leading to a self-reinforcing death spiral and ultimate insolvency of the LDI funds.”

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