The Bank of England has widened its bond purchasing programme to include index-linked gilts after another turbulent day in UK bond markets.
The central bank announced this morning (October 11) that it was taking the measure to ease the prospect of a “fire sale” in gilts, which poses a “material risk to UK financial stability”.
The update was in reaction to market moves yesterday, which saw UK 10-year inflation-linked gilt yields rise 64 basis points, to 1.24 per cent, an unusually big move.
The BoE said this dysfunction and “significant repricing” has forced it to act to ensure a backstop and “restore orderly market conditions” by temporarily absorbing the selling of index-linked gilts in excess of the capacity of market intermediaries.
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial, said: "The response of the Bank of England underlines its flexibility when it comes to intervening in the bond market, which is good news. The not-so-good news is that it also shows how volatile the market is and the apocalyptic impact the government's ill-thought out mini "Budget" and unfunded spending have had on gilts."
Budget problems
The volatility in UK government bond markets began after the chancellor announced a raft of unfunded tax cuts in the “mini” Budget last month, prompting a sell off in gilts.
These market jitters were exacerbated by a lack of economic forecast from the Office for Budget Responsibility, which is usually issued alongside any budget.
The rising yields then triggered margin calls for pension schemes holding liability-driven investments, which were forced to sell off their liquid assets to make up the cash, which included gilts.
This fire sale threatened to wipe out the value of defined benefit pension fund investments in some pooled LDI funds, according to the deputy governor of the Bank of England.
The central bank stepped in on September 28, suspending a planned gilt sale, and yesterday expanded the size of its remaining gilt purchases.
The programme is due to end this Friday (October 14).
Since the budget, the IMF has warned the UK that it should re-evaluate its tax cuts, and two ratings agencies have downgraded UK debt.
sally.hickey@ft.com
