UK Emergency Bond Purchases Lead to Declining Yields... US 10-Year Hits 4% Then Falls

[Asia Economy New York=Special Correspondent Joselgina] The Bank of England (BOE), the central bank of the United Kingdom, took out the large-scale government bond purchase card to stabilize the financial market thrown into confusion by the tax cut plan, causing major countries' government bond yields, including the United States, to show a downward trend on the 28th (local time).

In the New York bond market, the yield on the US 10-year Treasury briefly surpassed 4% immediately after BOE's announcement of bond purchases, then stabilized to around 3.7% as of the afternoon before market close. The Wall Street Journal (WSJ) analyzed that this daily decline was the largest since March 2020. The 2-year yield, sensitive to monetary policy, also fell from an intraday high of 4.316% to 4.09%. The decline in government bond yields indicates a rise in bond prices.

The decline in government bond yields on this day was led by UK government bonds. The UK 10-year yield fell from 4.5% before BOE’s bond purchase announcement to around 4.08% afterward. The 30-year yield, which surpassed 5% to reach a 20-year high on the same day, also dropped by 1 percentage point immediately after.

After the UK government revealed a large-scale tax cut plan on the 23rd, the pound sterling plunged to an all-time low against the dollar and government bond yields surged, increasing financial market volatility. In response, BOE announced on this day that it would purchase long-term government bonds until October 4 to stabilize the financial market. This was due to concerns that the rapid increase in bond market volatility could lead pension funds to insolvency. The Telegraph reported that BOE would purchase a total of ?65 billion (101 trillion KRW) worth of bonds at a rate of ?5 billion per day.

Subsequently, the German 10-year yield fell from around 2.35% to 2.11%, and the French 10-year yield dropped from about 2.95% to 2.72%.

The strong dollar also eased somewhat in the foreign exchange market. The Dollar Index, which measures the value of the dollar against six major currencies, fell from around 114 the previous day to about 112.

The New York stock market rebounded. As of 3:50 p.m. before market close, the three major indices were recording gains in the 3% range.

However, since this is only a short-term measure and the trust issue of the UK government has not been resolved, concerns are pouring in that financial market volatility originating from the UK will continue for the time being.

So far this year, major countries’ government bond yields have continued to rise due to interest rate hikes by central banks including the Federal Reserve (Fed). WSJ reported that the US 10-year yield has risen by 2.5 percentage points so far this year until the previous day, marking the largest increase since 1981.