Bank of England extends bond purchases to avoid ‘fire sale’ | bank of england

The Bank of England intervened on Tuesday with another emergency intervention in the markets to try to avoid a “fire sale” of British government bonds by pension funds.

In the second update of its bond-buying program in as many days, the Bank announced that it would expand its operations to include purchases of index-linked gilts, a type of UK government bond that tracks the ‘inflation.

Threadneedle Street said it was taking the decision to further increase its emergency program, which is due to expire on Friday, after a “significant revaluation” of Britain’s public debt this week.

UK government borrowing costs rose sharply on Monday to the highest levels since the financial market chaos sparked by the Kwasi Kwarteng mini-budget in September, despite renewed UK efforts to ease the turmoil .

The central bank was forced to intervene late last month amid a dramatic sell-off in long-term government debt, with a promise to buy up to £65billion of government bonds stocks as part of a program running until October 14 to ease market turmoil.

In the final week of the program, the Bank warned that there remained risks to the financial stability of pension funds in ‘liability-driven investing’ schemes, which were overtaken by the dramatic rise in yields UK government bonds since the Chancellor’s mini budget.

“The dysfunction of this market and the prospect of self-reinforcing ‘fire selling’ dynamics pose a significant risk to the financial stability of the UK,” the Bank said in a statement.

Sir John Gieve, a former deputy governor of the Bank of England, said movements in bond markets on Monday must have “alarmed” the central bank, prompting action on Tuesday.

The Bank’s decision to include pegged gilt purchases comes after it said on Monday it would relax the program’s criteria. It had promised to increase the capacity of its scheme to £10bn a day from a previous level of £5bn to ensure there was sufficient capacity in the market before the scheme ended. The Bank has, however, used limited amounts of this overall capacity, buying less than £6bn of its potential total of £65bn so far.

Threadneedle Street said the upgrade to its scheme to include indexed gilts would continue until October 14, when its emergency response would still end as scheduled.

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