UK bond liquidity barely improves after BoE intervention - ING

FILE PHOTO: Pound notes and coins are seen inside a cash register in a bar in Manchester, Britain

(Reuters) -The spread between bid and ask prices on British bonds, reflecting the ease of trading in such debt, was only slightly tighter on Thursday than at its peak before the Bank of England intervened to calm markets, data from ING Bank citing Tradeweb showed.

This suggests conditions in Britain's government bond market remain tough after the rout triggered by last Friday's mini-budget and its unfunded tax cuts.

The Bank of England said on Wednesday it would buy some 65 billion pounds of long-dated bonds to calm markets. That announcement stoked further volatility, prompting a huge rally on Wednesday that saw 30-year bond yields fall some 100 bps.

The average of bid-ask spreads on 2-, 5-, 10- and 30-year gilts was at 6.225 basis points on Thursday, according to ING, down marginally from a peak 6.4 basis points seen on Tuesday, before the BoE intervened. Tuesday's peak was the highest on record in ING's dataset going back to 2017.

The spread was at just 2.15 bps last Thursday, the day before the government's mini-budget, the data showed.

It had averaged around 1.4 bps since the start of the year until the announcement.

Widening bid-ask spreads mean the difference between the price sellers are asking and buyers are willing to pay is increasing, making it harder and more costly for investors to trade in and out of positions.

Such wide spreads on government bonds are particularly troubling to investors, given they are meant to be among the safest and most liquid assets in the financial system.

In past episodes of severe market volatility investors have also said that sellers end up accepting lower prices than indicated on trading platforms, meaning liquidity could be poorer than such figures show.

"Thirty-year (bonds) stabilised today after a 100 basis-point rally yesterday so I think we can say that that aspect of the intervention has worked but restoring market functioning is a different matter altogether," said Antoine Bouvet, senior rates strategist at ING.

"We'll have to wait longer for confidence to return, and extend their support beyond October 14, even if they don’t end up buying much," he said, referring to the date the BoE has said its bond-buying auctions will end.

Gilt yields rose moderately on Thursday. Thirty-year gilt yields, which surged to a 20-year high above 5% on Wednesday, before sliding after the BoE intervention, were up about 3 bps at 3.96%.

(Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe and Hugh Lawson)