The Bank of England has expanded its emergency bond purchase programme, pledging to buy up to £5billion of inflation-linked gilts per day after yields soared on Monday.
Citing a ‘material risk’ to financial stability arising from heavy Government bond selling, the bank said the purchases would begin today and run until the end of this week.
Ten-year inflation-linked gilt yields, which rise as bond prices fall, rose 64 basis points on Monday, hitting 1.24 per cent – the largest rise since at least 1992 – with some analysts blaming the sell-off on LDI pension fund investors forced to sell them alongside traditional government bonds.
It is the second day this week the BoE has been forced to intervene in Government debt markets
‘These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity,’ the BoE said in a statement.
The pound fell in the wake of the announcement and is currently down 0.47 per cent to $1.1022.
Holders of gilts are concerned about what will happen when the BoE’s emergency intervention measures end on Friday.
The Chancellor is set to bring forward his fiscal plan to 31 October, from 23 November initially, as the Government hopes to reclaim credibility with international investors.
Monday’s inflation-linked gilt sell-off came despite the Bank of England’s initial intervention, which saw it commit to buying up to £10billion of traditional gilts per day.
Traditional gilt yields also rose on Monday but inched lower on Tuesday following the bank’s announcement.
‘The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,’ the BoE said.
‘Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.’
Inflation-linked gilts are typically held by pension funds, which have been forced to raise cash by selling the assets after Chancellor Kwasi Kwarteng’s ill-fated mini-budget led to a rout in UK government debt, when investors were spooked by plans for large debt-funded tax cuts.
Pension funds were forced to stump up emergency collateral in liability-driven investments (LDI), which use derivatives to safeguard against shortfalls in pension pots, after British government bond yields rocketed.
To halt freefalling prices, the BoE was forced to pledge to buy as much as £65billion of gilts.
Head of FX analysis at Monex Europe Simon Harvey said: ‘The latest news by the BoE hasn’t corresponded to a surge in the pound like it did back on 28 September.
‘In our view, this is because the latest news by the BoE suggests that their withdrawal of support to the bond market on Friday will be too premature given the level of bond market dysfunction.
‘In the absence of an extension to the BoE’s backstop, in a more robust form than a temporary repo facility, FX traders are likely taking a bearish position on the pound ahead of what could be further market turmoil heading into next week, especially as broader risk conditions remain under substantial pressure.’
