The Bank of England in the city of London. The pound suffered further falls on Wednesday after the UK Government was heavily criticised by the International Monetary Fund over its handling of economic policy. Picture date: Wednesday September 28, 2022.

Long-term bond yields rise as Bank of England doubles potential value of daily gilt purchases | Economic news

The Bank of England has announced it is doubling the value of UK government bonds it can buy as it enters the final days of its emergency bond buying program in a bid to support the pension market and allay fears of a cliff-edge end.

The Bank said it was now ready to buy £10billion a day worth of bonds, double the £5billion a day it announced September 28 – a measure which, according to her, would end on October 14.

Government bonds, called gilts, are used by the state to raise funds.

What are bonds, how are they different from gilts and where do they fit in the mini-budget crisis?

The Bank has announced its program for the temporary and emergency purchase of long-term gilts, which are to be repaid in 20 to 30 years, following the decision of Chancellor Kwasi Kwarteng mini budget announcement.

The market turmoil that resulted from the mini-budget led to a unprecedented intervention of the regulator to prevent part of the repo market crash as the cost of interest on government securities rose.

The so-called yield fell at the time of the Bank’s intervention, but has been rising ever since.

Yields on 20- and 30-year gilts jumped nearly 30 basis points on Monday, approaching their levels in the
worst of last month’s market rout at 4.9% and 4.7% respectively.

To date, only £5bn has been spent on eight days of the 13-day bond buyback, the Bank announced on Monday.

The emergency measure was taken to reduce the risk “of contagion to credit conditions for UK households and businesses”, the Bank added.

Now he has said he is ready to increase the amount he buys until the measure ends on Friday, using money he has set aside for the scheme, £65bn, to do this.

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The announcement will be seen as an effort to calm the market and avoid fears that the market will react again when the program ends.

In a further effort to support the pensions market without prolonging the bond purchase programme, the Bank announced a new temporary but open-ended measure to help banks facing liquidity problems cope with the pension market corner who had experienced difficulties.

It emerged later in the day that the Bank had bought £853.1million of long-term bonds on Monday, its maximum since September 30, but far less than the £10billion it announced be open for purchase.

A total of £262.6m in offers were rejected.

Read more:
Bank of England official slams government’s mini-budget action – as sidelined OBR creates more ‘uncertainty’
It’s unclear which policy tipped the markets – or which Chancellor can reverse to put the genie back in the bottle

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