BoE expands emergency bond buying to inflation-linked gilts
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Sovereign debt sell-off leads Bank of England to buy up to £5bn in inflation-linked government bonds a day after intervention failed to calm the market
- Purchases begin today and end Friday with the rest of the emergency program
- Yields continued to rise Monday despite the bank’s first intervention
- The move is putting further pressure on sterling, which has fallen in early trading
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The Bank of England has expanded its emergency bond-buying program, pledging to buy up to £5bn of inflation-linked government bonds a day after interest rates soared Monday.
Citing a “material risk” to financial stability from heavy government bond sales, the bank said purchases would begin today and continue through the end of this week.
Ten-year inflation-linked government bond yields, which rise as bond prices fall, rose 64 basis points Monday, reaching 1.24 percent — the largest increase since at least 1992 — with some analysts blaming the forced sell-off of LDI pension fund investors to help them lose out. together with traditional government bonds.
It’s the second day this week that the BoE has been forced to intervene in sovereign debt markets
“These additional operations will provide an additional safety net to restore orderly market conditions by temporarily absorbing sales of indexed gilts above market brokerage capacity,” the BoE said in a statement.
The pound fell in the wake of the announcement and is currently down 0.47 percent to $1.1022.
Gilt holders are concerned about what will happen if the BoE’s emergency intervention measures end on Friday.
The chancellor will bring forward his budget plan to October 31, initially from November 23, as the government hopes to regain credibility with international investors.
Monday’s inflation-linked sell-off of gold came despite initial intervention by the Bank of England, which committed to buying up to £10 billion worth of traditional gilts a day.
Traditional government bond yields also rose Monday, but fell Tuesday following the bank’s announcement.
“At the beginning of this week, the price of UK government debt, especially index-linked government bonds, rose significantly again,” the BoE said.
“Failure in this market and the prospect of a self-reinforcing fire sale dynamic pose a material risk to the UK’s financial stability.”
Inflation-linked government bonds are typically in the hands of pension funds, which have been forced to raise cash by selling the assets after Chancellor Kwasi Kwarteng’s ill-fated mini-budget led to a slump in Britain’s public debt, as investors balk at plans for major debt – funded tax cuts.
Pension funds were forced to pile emergency collateral into liability-driven investments (LDI), which use derivatives to protect against shortfalls in pension pots, after UK government bond yields skyrocketed.
To stop the free fall in prices, the BoE was forced to pledge to buy a whopping £65 billion worth of gilts.
Head of FX Analysis at Monex Europe Simon Harvey said: “The latest news from the BoE did not match the pound’s gains as it did on September 28th.
“We believe this is because the latest news from the BoE suggests that withdrawing support from the bond market on Friday will be premature given the degree of bond market dysfunction.
In the absence of an extension of the BoE’s backstop in a more robust form than a temporary repo facility, currency traders are likely to take a bearish position on the pound ahead of what could be further market turmoil next week, especially as broader risk conditions remain under considerable pressure.’