GBP: Heading lower on more UK bond carnage

The UK debt market faced a fresh round of turmoil yesterday, with 10-year inflationlinked yields rising by 64bp, signalling how the British bond market remains highly dysfunctional. Those securities were likely at the epicentre of the sell-off as large parts of the holders were pension funds who are running liability-driven investment strategies following the post-Mini Budget market meltdown.
This morning, the Bank of England delivered another pre-market attempt to calm
investors, by announcing it will widen the scope of daily gilt purchase operations,
including inflation-linked bonds. This follows yesterday’s increase of the upper limit
of daily purchases of long-term bonds from £5bn to £10bn as well as the
deployment of a temporary repo facility.
All eyes today will be on how the gilt market will receive the new emergency
measures by the BoE, with a specific focus on the results of a 30-year linker auction.
The other major event to keep an eye on are the speeches by Jon Cunliffe and
above all from BoE Governor Andrew Bailey at the IIF annual meeting in Washington. On the data side, UK jobs data came in quite solid this morning, with average weekly earnings touching 6.0% YoY, ultimately offering no reasons for the BoE to turn less hawkish.
We continue to see downside risks for the pound, as levels around 1.10 do not
mirror the fragility of the UK bond market.

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