Unexpected BOE Rate Hold Sparks Distrust... US and UK Government Bond Yields Plunge

"Complaints Pour In Such as 'Worst Communication with BOE and BOE's Own Goal'
UK Interest Rates Plunge Most Since Brexit Vote... US 'Tapering' Erased"

[Asia Economy Reporter Park Byung-hee] U.S. Treasury yields fell sharply on the 4th (local time). The Bank of England (BOE), the central bank of the United Kingdom, unexpectedly decided to keep its benchmark interest rate unchanged on the day, and the impact affected not only the UK but also the U.S. bond market.

As the BOE overturned market expectations, criticism has surged that BOE Governor Andrew Bailey failed to communicate with the market. Analysts say that the BOE's unexpected decision erased the effect of the Federal Reserve's (Fed) tapering (asset purchase reduction) announcement the previous day.

According to Bloomberg and others, UK government bond yields fell sharply on the day. The BOE's decision to keep the benchmark interest rate unchanged led to a surge in bond purchase orders. Bond prices move inversely to yields.

The 2-year UK government bond yield plunged by 0.21 percentage points to close at 0.48%. Bloomberg reported the news when it fell by 0.17 percentage points during the session, describing it as the largest drop since the global COVID-19 pandemic began. According to Bloomberg, the 5-year government bond yield recorded the largest drop since the Brexit vote (June 23, 2016). The 5-year bond yield fell sharply by 0.20 percentage points to 0.64%. The 10-year government bond yield also closed at 0.94%, down 0.13 percentage points from the previous day.

Bloomberg analyzed that bond yields plunged as traders significantly lowered their expectations for an interest rate hike. Before this monetary policy meeting, traders had expected the BOE to raise the benchmark interest rate by 0.15 percentage points.

Initially, Governor Bailey expressed the view that inflation would be temporary and that it would take a long time before an interest rate hike. However, as natural gas prices surged and inflationary pressures intensified, Bailey recently changed his stance. On the 17th of last month, he said, "The BOE will take action to prevent inflation expectations from spreading." The atmosphere was that an interest rate hike was becoming a foregone conclusion.

Andrew Bailey, Governor of the Bank of England (BOE)
Photo by AFP Yonhap News

When the decision to keep rates unchanged was made at the monetary policy meeting, traders were taken aback and began large-scale bond buying. Among traders, complaints erupted that Governor Bailey was an unreliable person.

Aaron Lonn, director at Aberdeen, an investment firm based in Edinburgh, UK, pointed out, "The post-monetary policy meeting press conference will be one of the worst communication failures since the BOE gained independence from the government in 1997." Michael Hewson, investment strategist at CMC Markets, said, "The decision to keep the benchmark rate unchanged is an own goal by the BOE."

The British pound also plunged. Expectations that pound liquidity would decrease were overturned, causing the pound's value against the dollar to fall more than 1%, pushing the pound-dollar exchange rate below $1.35 per pound.

The sharp drop in UK government bond yields also affected the U.S. bond market. The U.S. 10-year Treasury yield closed at 1.53%, down 0.08 percentage points, extending its intraday decline to 0.10 percentage points. The 2-year U.S. Treasury yield fell by 0.04 percentage points on the day. The 5-year Treasury yield dropped sharply by 0.08 percentage points and showed a decline of 0.1 percentage points during the session.

Although the Fed's tapering announcement the previous day was an expected outcome, the Fed's declaration to stop large-scale purchases was clearly a factor for bond price declines, yet prices instead rose.

Bloomberg analyzed that the BOE's decision to keep rates unchanged weakened expectations for rate hikes, leading to declines in government bond yields in both the U.S. and the UK. The BOE's missed rate hike expectations effectively erased the impact of the U.S. tapering announcement.

This content was produced with the assistance of AI translation services.