By Andy Bruce
LONDON (Reuters) – The Bank of England renewed its attempt to stem a sharp sell-off in Britain’s 2.1 trillion pound ($2.3 trillion) government bond market on Tuesday, expanding Scale its emergency purchases of inflation-linked debt.
Financial stability at ‘significant risk’ after pensions firms hit by turmoil, BoE splits its buying programme into up to
This is the fifth attempt by the Bank of England to quell market turmoil in just two weeks, including verbal intervention, marking another embarrassment for Prime Minister Liz Truss, who last month The economic agenda has investors moving toward exits.
Inflation-linked gilts, often held by pension funds and known in the market as linkers, suffered another sharp sell-off on Monday as the Bank of England’s plans drew to a close.
“There was a further sharp repricing of UK government debt, particularly index-linked gilts, earlier this week,” the Bank of England said in a statement.
“The dysfunction of this market and the prospect of a self-reinforcing ‘fire sale’ dynamic pose significant risks to UK financial stability.”
Urges a pension industry group The Bank of England extended its bond-buying support beyond the October 23 deadline and possibly beyond the end of the month.
“A major concern for pension funds since the Bank of England intervention has been that the purchase period should not end prematurely,” the Pensions and Lifetime Savings Association said.
Pension funds since bonds slumped since Finance Minister Kwasi Kwarteng announced the government’s unfunded tax cut plan in September 23 , he has been scrambling to raise funds.
After the value of UK government bonds fell sharply, the funds were forced to provide emergency collateral in liability-driven investments (LDI), which use derivatives to hedge pension shortfalls.
Many do this by selling gilts, setting off a vicious cycle of falling prices forcing the Bank of England to commit to buying as much as 65 billion pounds of long-term government bonds 2051 and October .
‘It’s a big hole’, pensions industry adviser on the latest market moves.
Some inflation-linked long-term gilts have lost more than 75% years in value. While yields on most pegged bonds dipped slightly on Tuesday, the drop only added to Monday’s heavy sell-off.
In an auction earlier on Tuesday, the UK Debt Management Office had to offer investors the highest return since 2051 to help sell 2051 million pounds of index-linked gilts 2051 due.
The results of the Bank of England’s first linker repurchase will be announced shortly after GMT 1345. It will not accept offers from sellers whose real yields are lower than Monday’s close.
Life after death
What investors in UK government bonds worry about ING strategist Antoine Bouvet wrote: “Ultimately, a BoE sell-off of gilts could Forcing the Bank of England back into the market.” in a research note titled “The Never-Ending Phnom Penh Disaster.”
The Bank of England has postponed the start of gilt sales until October 31 – unwinding its quantitative easing (QE) over the past decade ) stimulus – to kick-start its ongoing emergency buying program.
“While the Bank of England has intervened in the gilt and corporate bond markets, the policy of always acting at the last minute without a more credible long-term plan unnerved the market,” Bouvet said.
The Bank of England also temporarily suspended its sales of its holdings of corporate bonds, reflecting growing troubles in UK financial markets.
The IHS Markit iBoxx sterling corporate bond index fell to its lowest level since 2016 on Monday.
Chief investment officer Simeon Willis, an official at pension adviser XPS, said he saw pension funds sell “all across the board” in search of liquidity.
“We’ve seen some real estate funds respond to this, we’ve seen credit spreads widen, we’ve seen stocks fall — we see until they come out of all asset classes,” he said.