HomeBusinessBank of England intervenes in bond markets again, warns of 'material risk'...

Bank of England intervenes in bond markets again, warns of ‘material risk’ to UK financial stability

The Bank of England raised interest rates by 0.5 percentage point on Thursday.

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LONDON (Reuters) – The Bank of England on Tuesday announced an extension of its emergency buyback operation as it seeks to restore order to the country’s chaotic bond market.

The central bank said it will expand its purchases of UK government bonds – known as gilts – with indexed gilts from October 11 to 14. retail price index.

The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after it raised the limit on its daily gold purchases on Monday ahead of the planned end of the buying plan on Friday.

The Bank launched its emergency intervention on September 28 after an unprecedented sell-off of long-dated UK government bonds threatened the collapse of the multiple liability-driven investment funds (LDI), which are widely held by UK pension schemes.

“At the start of this week, UK sovereign debt has again risen significantly, especially in indexed government bonds. Failure in this market and the prospect of a self-reinforcing ‘fire sale’ dynamic pose a material risk to the UK’s financial stability, The bank said in a statement on Tuesday.

UK 10-year index-linked government bonds rose 64 basis points on Monday, representing a massive 5.5% drop in prices. Meanwhile, 30-year indexed gold prices fell 16% on the day, with returns now hovering around 1.5% from -1.5% just six months ago. Revenues move inversely to prices.

Movements of this magnitude are highly unusual in developed country government bond markets.

“These additional operations will serve as a further backstop to restore orderly market conditions by temporarily absorbing sales of indexed gilts above market intermediation capacity,” the Bank said on Tuesday.

“As with conventional gold-plated purchases, these additional indexed gold-plated purchases will be time-limited and fully reimbursed by HM Treasury.”

On Monday, the Bank set the cap on its daily gold purchases at £10 billion ($11 billion), of which up to £5 billion will be allocated to conventional gilts and £5 billion to indexed gilts.

The size of the auctions will continue to be reviewed, the Bank said, and all purchases will be completed “in a smooth and orderly manner once the risks to the functioning of the market are deemed to have diminished”.

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