The Bank of England expanded its emergency bond-buying programme on Tuesday for the second time this week.
The Bank said the programme will now include index-linked bonds, which are linked to inflation.
It noted that the start of this week has seen a “further significant repricing” of UK government debt, particularly index-linked gilts. “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” it said.
The change will take place with immediate effect until 14 October, alongside the Bank’s existing daily conventional gilt purchase auctions.
“These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity,” it said.
The announcement followed another selloff in UK debt markets, particularly in the index-linked market, and came just a day after the BoE said it would double the size of its daily purchases to £10bn.
The BoE also announced on Monday a temporary expanded collateral repo facility (TECRF), to help banks “ease liquidity pressures facing their client LDI funds through liquidity insurance operators”, which will run beyond the end of this week.
In addition, it said it stood ready to support further easing of liquidity pressures facing LDI funds through its regular Indexed Long Term Repo operations.
Neil Wilson, chief market analyst at Markets.com, said: “It all seems rather messy and panicky – as expected the market was always going to retest the Bank’s resolve and put the Budget to the sword. To expand your emergency intervention in the market once is unfortunate, to do so twice looks like carelessness.”
Wilson said it was unlikely that Friday will be the last day of the Bank’s intervention in the gilt market. “You’d think it will need to continue right up until either something really breaks and it gives up, or the Chancellor reveals his cunning plan to restore order,” he said.
“Time-limited central bank backstops are not prone to succeeding in the long run. Usually, the market waits for the intervention to end before retesting the limits. Markets are like toddlers – always testing the boundaries, wildly overreacting and usually working to cause maximum mayhem at the most inconvenient times.”