THE Bank of England has stepped in once again to steady markets by buying inflation-linked UK government bonds.
The BoE said the ongoing instability in the bonds market poses a “material risk to UK financial instability”.
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As part of an emergency move to calm markets, the BoE will widen the scope of its government bond purchase programme to include index-linked bonds.
It will buy up to £5billion of these bonds per day, starting today, Tuesday, October 11, until October 14.
The government bond market is worth £2.1trillion, and underpins the UK financial market.
Bonds are IOU notes that the government uses to borrow money and pay a fixed amount in interest.
Government bonds are called GILTS and are bought and sold by investors, including pension funds, who like them because they are usually fairly stable, long term investments and help cushion them from interest rate volatility.
Gilts tend to go down in price when interest rates are rising, and increase when rates are falling.
People pay attention to the YIELDS – the amount of interest on the bonds which is described in % terms – because this shows investors’ confidence in them.
The higher the yield, the cheaper the price, and the riskier investors think they are.
Bonds are in the spotlight at the moment because yields on gilts are trading at the same highs as in the scary days of the last financial crisis in 2008, suggesting investors are nervous about the UK economy.
The yield on a 30 year gilt is 4.5% – the highest level in 14 years.
The Bank of England is stepping in to buy more of them in order to prevent the collapse of the government bond market.
The BoE said: “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.”
In September, it dramatically stepped in to avoid pension funds collapsing by buying government bonds in the fallout of the mini-Budget.
Markets were spooked about the rising amount of government debt.
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