BoE expands emergency bond-buying scheme

by | Oct 10, 2022

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The Bank of England has announced fresh measures to support the UK’s financial markets after the government’s controversial mini-budget sparked turmoil in the pensions industry.
Chancellor Kwasi Kwarteng announced £45bn of borrowing-funded tax cuts at the end of September, but provided no economic forecasts or spending plans.

His statement caused the pound to plunge while yields on government debt rose. The BoE was forced to step in and buy gilts in a “temporary and targeted intervention”, after it emerged that some pension funds were at risk of collapse, because of rising collateral calls on liability-driven investments (LDIs).

Since the intervention, the pound has recovered some of its losses while yields have ticked lower. But many analysts remained concerned about what will happen when the BoE’s support is withdrawn.

On Monday, the central bank reaffirmed that the scheme would end on 14 October, but said it was introducing three measures “to support an orderly end”.

In particular, it is doubling the daily maximum auction size, to £10bn, until the scheme ends.

When the scheme was first announced, the BoE said it would make £65bn of funding available. Since then it has carried out eight daily auctions, offering to buy up to £40bn, and has made around £5bn of purchases.

It also announced 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.

The BoE also said it “stood ready” to support further easing of liquidity pressures facing LDI funds through its regular Indexed Long Term Repo operations.

Russ Mould, investment director at AJ Bell, said: “While this programme is designed to provide calm to the markets, following concerns about pension funds dumping gilts on the market, the fact it has doubled the previous limit of £5bn also acts as a reminder that we’re living in unsettled times.”

Neil Wilson, chief market analyst at Markets.com, said: “The Bank might be concerned about what happens when it stops – the market should be aware that the central bank is prepared to step in, but yields are creeping up. The 10-year gilt moved from 3.75% to 4.25%, while the 30-year has risen from around 3.8% at last week’s lows to 4.4%.

“The Bank made it clear it will be the market marker of last resort, but we are not home and dry just yet.”

Victoria Scholar, head of investment at Interactive Investor, said: “The central bank’s action have helped to calm government debt markets, but there are concerns about what happens next week, with question marks around whether dysfunction will return to the market.”

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