By Jack Barnett
The Bank of England today stepped up its emergency bond buying scheme to tackle “a material risk to UK financial stability”.
It is the second time in as many days the Bank has ramped up support for the UK bond market, underscoring the scale of volatility it is grappling with.
The monetary authority led by Andrew Bailey will now buy index-linked gilts, a bond linked to inflation issued by the UK government.
Earlier this week, the Bank doubled the cap on the value of gilts it can buy daily to £10bn.
Rising yields on UK debt in recent days has forced the Bank into a two-pronged expansion of its time-limited £65bn intervention in the bond market.
Financial markets have been rocked by prime minister Liz Truss and chancellor Kwasi Kwarteng launching £43bn of unfunded tax cuts and ramping up borrowing substantially.
The measures have fuelled a gilt sell off and forced the pound lower.
The central bank is worried ongoing UK bond market volatility could drive what it today described a “fire sale” that would lead to financial instability filtering through the UK economy.
Despite the announcement, yields on 30-year gilts, which have come under intense pressure since the government’s mini budget, jumped around six basis points.
Rising yields are likely connected to concerns over the underlying fragility of the UK bond market erupting after the Bank’s emergency support ends on Friday.
Today, the Pensions and Lifetime Savings Association, the trade body, said the Bank should extend its temporary bond purchases “possibly beyond” 31 October.
The sudden cliff edge is a “key concern” for pension funds, the body said.
Industry experts repeated those worries.
Pensions partner at Eversheds Sutherland Ian Stanley told City A.M. bond market upheaval is “expected to return” if the Bank’s scheme ends later this week.
Funds are “rebuilding liquidity” ahead of the cut off, he added.
Rates on the 10-year UK gilt cooled today. Prices and yields move inversely.
The pound strengthened around one per cent against the US dollar. London’s FTSE 100 closed lower.
After the last month’s mini budget, the pound plunged to a record low against the dollar and UK borrowing costs climbed to their steepest level in 20 years.
That volatility prompted lenders to funds in which pensions are invested, so-called liability driven investment (LDI) funds, to demand they stump up cash immediately to cover losses.
LDI funds then ditched UK bonds quickly, forcing yields higher and prompting the Bank to step in.
The central bank has used nowhere the maximum £65bn of bond purchases allocated under the package.
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