London — In an effort to bring some order to the nation’s chaotic bond market, the Bank of England on Tuesday announced an expansion of its emergency bond-buying operation.
Index-linked gilts will now be included in the central bank’s purchases of U.K. government bonds, or “gilts,” from October 11 through October 14. Bonds known as “index-linked gilts” are those whose payouts to bondholders are benchmarked against the UK retail price index.
The Bank’s exceptional rescue package has now been boosted a second time in as many days. On Monday, the limit for daily gilt purchases was raised in anticipation of the purchase program’s scheduled termination on Friday.
After an unexpected sell-off in long-dated UK government bonds threatened to bring multiple liability driven investment (LDI) funds, which are heavily held by UK pension schemes, down, the Bank began its emergency intervention on September 28.
“UK government debt, especially index-linked gilts, has experienced a further major repricing at the start of this week. The bank stated in a statement on Tuesday that market dysfunction and the potential for self-reinforcing “fire sale” dynamics pose a significant danger to the financial stability of the UK.
On Monday, U.K. 10-year index-linked gilt rates increased by 64 basis points, resulting in a steep price decline of 5.5%. The price of 30-year index-linked gilts was down 16% on the day while yields, which were at -1.5% just six months ago, are now at roughly 1.5%. Yields move the other way to prices.
The markets for sovereign bonds in affluent nations rarely see movements of this size.
By temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity, these additional operations will function as a supplementary backstop to restore orderly market conditions, the Bank stated on Tuesday.
These new index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury, much like the traditional gilt purchase operations.
The Bank set the cap on its daily gilt purchases on Monday at £10 billion ($11 billion), of which up to £5 billion will be used to acquire traditional gilts and up to £5 billion will be used to purchase index-linked gilts.
The Bank stated that all purchases will be “unwound in a smooth and orderly fashion whenever risks to market functioning are judged to have receded” and that the magnitude of auctions will continue to be reviewed.