That Bank of England stepped in with another emergency intervention in the markets on Tuesday in an attempt to avert a “fire sale” of UK government bonds by pension funds.
In the second update to its bond-buying scheme in as many days, the bank said it would expand its activities to include buying index-linked gilts, a type of UK government bond that tracks inflation.
Threadneedle Street said it took the step to further increase its emergency programme, due to expire on Friday, following a “significant repricing” of UK sovereign debt this week.
British government borrowing costs rose sharply on Monday to the highest levels since the turmoil in financial markets sparked by Kwasi Kwarteng’s mini-budget in September, despite renewed efforts by the government to smooth the turmoil.
The central bank was forced to step in late last month amid a dramatic sell-off of long-dated government debt, with a pledge to buy up to £65bn. in British government bonds in a scheme that runs until October 14 to ease market turmoil.
In the final week of the scheme, the bank warned there were still financial stability risks for pension funds in “commitment-driven investment” schemes, which have been caught up in the dramatic rise in UK government bond yields since the chancellor’s mini-budget.
“Dysfunction in this market and the prospect of self-reinforcing ‘fire sale’ dynamics pose a significant risk to UK financial stability,” the bank said in a statement.
Sir John Gieve, a former deputy governor of the Bank of England, said the moves in bond markets on Monday must have “alarmed” the central bank, prompting Tuesday’s action.
The bank’s move to include buying index-linked gilts comes after it said on Monday it would loosen the criteria for the scheme. It had promised to increase the capacity of its program to £10bn. per day from a previous level of £5bn. to ensure that there was sufficient capacity on the market before the end of the programme. However, the bank has used limited amounts of this total capacity, having purchased less than DKK 6 billion. GBP out of its potential total of 65bn.
Threadneedle Street said the enhancement of its program to include index-regulated gilts would run until October 14, when its emergency intervention would still end as planned.