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Sterling and long-dated gilts fall as Truss fails to ease budgetary concerns

Sterling and long-term sovereign debt fell as jitters returned to UK financial markets on Wednesday, a week after dramatic Bank of England intervention halted a chaotic sell-off.

Sterling fell more than 2 percent against the dollar to $1.123 as the dramatic recovery from last week’s all-time low of $1.035 stalled. The moves, some of which reflected broad gains for the US currency, followed Liz Truss’ Tory conference speech in which she attempted to calm markets by declaring her commitment to fiscal discipline.

The latest declines come 12 days after the Truss government announced £45 billion in unfunded tax cuts that sent the currency and the UK bond market into free fall.

“There wasn’t a lot of detail on how they plan to be disciplined on public finances,” said Geoffrey Yu, market strategist at BNY Mellon. “It’s not good for credibility.”

UK government bonds were also hit by fresh falls, which accelerated after the BoE said it had refused to buy bonds for a second straight day as part of its long-term debt support program launched a week ago in order to alleviate a liquidity crisis in the fixed income sector .

30-year gilt yields, which rise as prices fall, climbed as much as 0.26 percentage points to 4.33%, the highest level since the BoE’s market intervention last Wednesday, before retreating to 4.21%.

Rohan Khanna, a rates strategist at UBS, said the moves were partly a result of confusion in markets over the type of moves likely to provoke further BoE buying.

“We learn about it every day,” Khanna said. “[The BoE is] clearly think the market has behaved well here as it is selling off along with other fixed income markets and therefore does not need intervention.”

The BoE wanted to clarify on Wednesday that the purpose of its purchases is to act as a backbone for restoring orderly trading in markets, rather than as an obligation to intervene at any particular level. “The bank’s allocation method is not based on absolute price or yield or the identity of the seller,” it said.

Wednesday’s moves further cement the trend seen since last month’s ‘mini’ budget for sterling and gilts to rise and fall in unison, a reversal of the typical relationship in developed markets, where higher borrowing costs normally support a currency.

Yu said the pattern, which is more likely to be seen in emerging markets, occurs as investors are betting that currency weakness – which is fueling inflation – will lead to faster central bank rate hikes.

“This is an important change in the UK foreign exchange system,” he said. “Sterling will struggle to change that.”

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