The Bank of England has stepped in with further emergency measures to calm markets, just a day after its last intervention, warning of a “material risk to UK financial stability”.
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The Bank has said it will buy further government bonds, including index-linked gilts, in an effort to avoid a sell-off which could lead pension funds to collapse.
In a statement, Threadneedle Street said, “The beginning 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 material risk to UK financial stability.
“Therefore the Bank is announcing today that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022 alongside the Bank’s existing daily conventional gilt purchase auctions.”
Interventions in bond market
The Bank has made multiple interventions in the gilt market for government bonds since Kwasi Kwarteng and Liz Truss’s ‘mini budget’ spooked investors.
Sandra Holdsworth, UK head of rates at Aegon Asset Management told the FT, “Two interventions in 24 hours is pretty extraordinary.”
Holdsworth warned that the problems in the UK pension industry appear to be “much bigger” than they appeared last week.
High yields
Yesterday, yields on 30-year-gilts rose to their highest level since before the bank’s intervention hints that there could be further turmoil ahead.
Antoine Bouvet, senior rates strategist at ING, said: “The suspicion is that risk reduction by pension funds has been too limited so far.
“The question is do they have enough cash to meet new collateral requirements if the gilt market sells off again, as the gilt purchases by the Bank of England end this week. I think the fear is that the answer’s no and that it will trigger the same snowball effect that we had two weeks ago.”
