UK 30-year gilts hit one-week low after BoE refrains from buying

LONDON (Reuters) - British 20- and 30-year government bonds fell sharply on Wednesday, after the Bank of England for a second day in a row bought no longer-dated bonds at its daily gilt market operation designed to stabilise markets.

Thirty-year gilt yields rose as much as 26 basis points (bps) to hit 4.328% at 1429 GMT, their highest since the BoE launched the temporary gilt purchase scheme on Sept. 28 to tame yields which had surged to a 20-year high above 5%.

That jump in borrowing costs came after finance minister Kwasi Kwarteng gave a fiscal statement on Sept. 23 which unsettled markets with its plans for 45 billion pounds ($51 billion) of unfunded tax cuts.

At 1555 GMT, 30-year yields were up 14 bps on the day at 4.21%, while benchmark 10-year yields were 16 bps higher at 4.03%, tracking a rise in U.S. Treasuries.

Last week, 30-year yields rose more than 100 bps in the space of a couple of days, their sharpest sell-off on record, threatening the stability of some pension funds and the broader economy and forcing the BoE to step in.

While the BoE's initial announcement sparked an immediate 100 bp fall in yields, its subsequent purchases have been far less than the 5 billion pounds a day it said it was open to buying.

So far this week it has bought just 22 million pounds of gilts with a maturity of 20 years or over on Monday, and none at all on Tuesday or Wednesday.

"By now most investors should have realised that the BoE temporary purchases are a backstop to disorderly market conditions," Morgan Stanley head of rates strategy Theo Chapsalis said in a note to clients.

The BoE issued a statement on Wednesday giving more detail about how it decided which offers to accept, and reiterating that it was not targeting a specific yield.

The purchases are due to cease on Oct. 14, and the BoE intends to start its postponed programme of gilt sales on Oct. 31.

Bond markets are calmer than they were last week, but yields are still higher than before Kwarteng's statement.

Britain received solid demand at a sale of 3.5 billion pounds of 10-year gilts earlier on Wednesday, but paid the highest yield at any auction since 2011, and over a percentage point more than at a similar auction a month ago.

In a further sign of rising yields, the United Kingdom Debt Management Office set a 4.125% coupon for a new five-year issue to be launched via auction on Oct. 12 - the biggest for any new issue since 2010, at least among gilts still in circulation.

($1 = 0.8877 pounds)

(Reporting by David Milliken)