The Bank of England has expanded its emergency bond buying operation for the second time this week, in a fresh attempt to calm the markets and protect pension funds.
The central bank is widening the scope of its daily programme in which it buys up UK government debt, to include purchases of index-linked government bonds.
In a statement, the Bank said there has been a “further significant repricing of UK government debt, particularly index-linked gilts”, which could threaten the UK’s financial stability.
It warned: “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”
That ‘fire sale’ dynamic is driven by pension funds using Liability Driven Investment strategies (LDIs). As government bond prices fall, LDI funds are forced to sell assets to cover losses, driving prices lower.
The move will act as a “further backstop to restore orderly market conditions”, the Bank said, by mopping up excess sales of index-linked gilts which the markets cannot cope with.
This £65bn bond-buying programme is still due to end on Friday.
Yesterday, the Bank doubled the size of its daily bond purchases, to a maximum of £10bn from £5bn.
Gilt yields dipped slightly today with the 30-year gilt yield down 3 basis points at 4.683%, while the 10-year has dipped 7 basis points to 4.4%.
Neil Wilson 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,” he added.