BoE widens gilt purchases after continued bond market volatility

The central bank announced on 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 the day before, 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.

The central bank stated that the purpose of its intervention “is to enable LDI funds to address risks to their resilience from volatility in the long-dated gilt market”.

“LDI funds have made substantial progress in doing so over the past week. However, the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” it said.

The volatility in UK government bond markets began after chancellor Kwasi kwarteng announced a raft of unfunded tax cuts in the “mini” Budget in September, 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 BoE deputy governor Sir Jon Cunliffe.

The central bank stepped in on September 28, suspending a planned gilt sale, and on October 10 expanded the size of its remaining gilt purchases. The programme is due to end on October 14.

This article originally appeared on FTAdviser.com