The Bank of England will double the value of the UK government bonds it can buy each day under the emergency system it was launched to calm the markets after Kwasi Kwarteng’s mini-budget.
Threadneedle Street was forced to intervene late last month amid a dramatic sell-off of long-dated government debt after the chancellor announced more than £40bn.
Pension funds, which manage huge sums on behalf of pensioners across Britain, were close to collapse amid the meltdown in the bond market, in a “judgment loop” of selling pressure, before the bank stepped in with a pledge to buy up to £65bn. bonds until October 14.
In the final week of its operations, the bank said it would increase the maximum value of bonds it could buy to £10bn. per day from a current level of £5bn. to ensure that there was “sufficient capacity in the market” before the end of the scheme.
The central bank has so far only bought around £5bn. in gold during the first eight days of the scheme, well below a maximum limit of £40bn. However, it signaled that it was “prepared to deploy this unused capacity” over the coming days to help ease pressure on bond markets.
The yield on 30-year government bonds fell from a peak of around 5% the day before the bank’s intervention last month to just under 4%, although it had climbed steadily back towards 4.5% in recent days.
It comes after interest rates – which rise as bond prices fall – rose by more than one percentage point in the wake of Kwarteng’s mini-budget.
Government bond yields across advanced economies have risen in recent weeks on fears of soaring inflation and rising interest rates from the US Federal Reserve. However, City economists have pointed the finger at the Chancellor’s unfunded tax cuts for exacerbating the sell-off in the UK bond market.
The bank’s deputy director of financial stability, Jon Cunliffe, appeared to suggest last week that the biggest moves in UK markets came after Kwarteng’s unfunded tax pledges.
As a result of the meltdown, pension funds invested in liability-driven investment (LDI) schemes. faced pressure as the value of the bonds they had pledged for their hedging activities collapsed.
Funds faced rolling “margin calls” to raise the amount of collateral – assets pledged as collateral to back a financial contract – which in turn prompted them to sell more bonds to cover cash requirements in a self-reinforcing downward spiral.
In addition to increasing the size of the bond-buying program, the bank said it would launch a facility to help commercial banks support pension funds struggling to find buyers and sellers for assets.
In addition to this week’s end of operations, it said it would work with the UK authorities and regulators to ensure the LDI industry operates on a more resilient basis in the future.