Bank of England rejects all gilts offered in market backstop operation

By David Milliken

LONDON (Reuters) - The Bank of England rejected all 2.23 billion pounds ($2.53 billion) of long-dated government bonds which it was offered on Tuesday at its daily auction aimed at stabilising markets and stopping a fire-sale of assets by pension funds.

The BoE said last week that it was open to buying up to 5 billion pounds of long-dated gilts a day at reverse auctions which it is holding until Oct. 14, subject to a reserve price which would vary depending on market conditions.

The BoE announced the operations on Sept. 28, when 30-year gilt yields hit a 20-year high above 5% in market turmoil after Kwasi Kwarteng's mini-budget. Thirty-year yields dropped 100 basis points (bps) shortly after the BoE announcement.

The actual volume of gilts purchased by the BoE so far has been low and looks unlikely to come close to the 65 billion pounds which initially looked possible.

On Monday the BoE bought just 22.1 million pounds of gilts with a maturity of 20 years or over, and in last week's three auctions it only bought 3.64 billion pounds in total.

Thirty-year gilt yields rose to a day's high of 3.996% after the BoE released the result of Tuesday's reverse auction, up 12 bps on the day, and at 1445 GMT they were at 3.97%, about 9 bps higher than before the auction result.

Late on Monday the BoE issued a statement reaffirming its willingness to buy up to 5 billion pounds of gilts, but reiterating that it would not buy gilts at any price.

"The Bank is studying patterns of demand and will continue to use reserve pricing in order to ensure the backstop objective of the tool is delivered," it said.

($1 = 0.8792 pounds)

(Reporting by David Milliken, editing by Andy Bruce)