The Bank of England intervenes again in bond markets, warning of ‘significant risk’ to UK financial stability

The Bank of England raised interest rates by 0.5 percentage points on Thursday.

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LONDON – The Bank of England announced on Tuesday an expansion of its emergency bond-buying operation as it looks to restore order to the country’s chaotic bond market.

The central bank said it will expand its purchases of UK government bonds – known as gilts – to include index-linked gilts from 11 October to 14 October. retail price index.

The move marks the second extension of the bank’s extraordinary bailout in as many days after it increased the limit of his daily purchases of gold on Monday prior to the scheduled end of the purchase arrangement on Friday.

The bank launched its emergency intervention on September 28 after an unprecedented sell-off in long-dated UK government bonds threatened to collapse multiple liability-driven investment funds (LDI).widely used by UK pension schemes.

“The start of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market and the prospect of self-reinforcing ‘fire sale’ dynamics pose a significant risk to UK financial stability.” The bank announced this in a statement on Tuesday.

UK 10-year indexed gold yields rose 64 basis points on Monday, representing a massive 5.5% price drop. Meanwhile, 30-year index gold prices fell 16% on the day, with yields now around 1.5%, having been at -1.5% just six months ago. Yields move inversely to prices.

Movements of this magnitude are highly unusual in developed country government bond markets.

“These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing sales of index-linked gilts in excess of market-making capacity,” the bank said on Tuesday.

“As with the conventional gilt purchase operations, these additional index-linked gold purchases will be time-limited and fully indemnified by HM Treasury.”

On Monday, the bank set the upper limit for its daily gilt purchases at 10 billion pounds ($11 billion), of which up to 5 billion pounds will be allocated to conventional gilts and 5 billion pounds to index-linked gilts.

The size of auctions will remain under review, the bank said, and all purchases will be “settled in a smooth and orderly manner when risks to the functioning of the market are deemed to have subsided.”

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