BoE widens bond buying, warns on ‘financial stability’

UK Central Bank

The Bank of England, the UK’s central bank, announced on Tuesday that it will “widen the scope” of its daily gilt purchase operations to include purchases of index-linked gilts.

The move is latest attempt by the central bank to stem a “fire sale” dynamic by pension funds that “pose a material risk to UK financial stability.”

The central bank said: “… the beginning 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.

“Therefore the Bank is announcing today that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts.

“This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022 alongside the Bank’s existing daily conventional gilt purchase auctions.”

The Pensions and Lifetime Savings Association (PLSA) said: ” … a key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility.”

However Bank of England governor Andrew Bailey told an event organised by the Institute of International Finance in Washington: “We’ve announced we will be out by the end of this week. My message to the (pension) funds is you’ve got three days left.”

The central bank said it has been working “with the UK authorities” to address risks to the resilience of Liability Driven Investment (LDI) pension funds “arising from volatility in the long-dated government bond (gilt) market.”

The central bank added: “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.

“As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury.

“The Bank has also consulted with the Debt Management Office.

“As announced on 10 October, the Bank stands ready to purchase up to £10bn of gilts each day, of which up to £5bn will be allocated to long-dated conventional gilts and up to £5bn to index-linked gilts.

“The pricing of this additional operation will reflect its nature as a backstop and that this is not a monetary policy instrument.

“The total size of these auctions will be kept under review. All purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.

“The Bank will temporarily pause its CBPS sales operations this week. Confirmation of these restarting will be included as part of the Bank’s regular operational announcements.”


The Pensions and Lifetime Savings Association (PLSA): “Following this morning’s and yesterday’s statements by the Bank of England, we will further assess with our members whether they believe any additional actions are necessary to achieve orderly markets.

“However, a key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility.

“With this in mind, we welcome that the Bank of England itself stated last week, that ‘it intends to unwind its gilt operation in a smooth and orderly fashion’ and only ‘once risks to market functioning are judged by the Bank to have subsided’.”

Victoria Scholar, Head of Investment, Interactive Investor: “The Bank of England has expanded its intervention into the UK government debt market to offset the market’s ‘dysfunction’ and stem financial contagion.

“The central bank is adding inflation-linked gilts to its purchases, buying up to £5 billion a day amid concerns about the impact of the declines in the bond market on pension funds.

“It comes a day after the Bank of England expanded its measures by introducing short-term funding for banks to help ease the squeeze on pension funds. UK government bonds are attempting to regain ground this morning after yesterday’s sharp sell-off.

“Since the Chancellor’s mini budget on 23rd September, the UK government bond market has been in disarray prompting three iterations of emergency intervention from the Bank of England.

“The central bank’s support is set to complete on 14th October, raising questions about what will happen to the bond market next week if the dysfunction persists.

“Meanwhile the pound is under pressure, trading at $1.10. It is down almost 20% against the US dollar since the start of January amid a drop in international investor confidence towards the UK coupled with strong demand for the greenback.

“This morning’s intervention is putting pressure on UK banking and insurance stocks like Legal & General and Aviva which have slumped to the bottom of the FTSE 100 while Barclays, Standard Chartered and NatWest have shed around 2% each.”

Richard Carter, head of fixed interest research at Quilter Cheviot: “This morning the Bank of England has once again felt the need to intervene in the fixed income market following yesterday’s announcement as it seeks to calm nerves and return stability to government bond markets.

“We are in somewhat unprecedented territory here and as a result yields continue to climb higher as investor fears are yet to be eased.

“The move by the BoE today to include index-linked gilts in their emergency quantitative easing programme is probably sensible given the massive rise in yields that occurred yesterday, however, it is going to be an incredibly difficult balancing act at a time when the Bank wants to be raising interest rates in order to bring inflation down.

“It is stuck between a rock and the hard place in combatting inflation at the same time as fiscal policy causes shockwaves in markets.

“As a result, we expect gilt markets to remain volatile ahead of the Chancellor’s fiscal plan speech at the end of the month and potentially beyond as it remains to be seen how effective the government’s growth plan will be.”

Joshua Raymond, director at online investment platform “With each move by the BoE to restore stability in the gilt market, the more serious market participants realise the problem facing UK financial security.

“Yesterday we saw the BoE double auction liquidity levels. Today they’ve widened the asset list to include index linked gilts.

“The last few days of trading have seen long term UK bond yields rising fast back towards levels before the BoE started to intervene.

“That tells you there’s a dislocation between the BoEs actions and investor confidence.

“Either the market believes the BoEs actions are too small and too temporary or there’s a serious lack of confidence in UK public finances.

“In all likelihood, it’s probably both and that’s very troubling for the medium term.”

deVere Group CEO Nigel Green: “The bond market is in utter chaos again. This has forced the Bank of England to step in with the unusual move to spend £5 billion on index-linked securities. It comes in addition to the £5 billion allocated for conventional gilts.

“Since the reckless ‘mini-budget’ at the end of last month, UK financial markets have been in a tailspin, reeling from the government’s controversial plans to slash taxes and increase spending in a desperate dash for growth.

“This latest dramatic selloff saw UK inflation-linked bond yields surging by record levels, forcing the Bank of England to intervene to try and restore some kind of order …

“We’ve now had weeks of markets being rattled – as we have seen with the turmoil in the mortgage market and the pension market, and with the plummeting pound – because there seems to be no credible long-term plan. Instead, it’s all just last-minute, reactionary moves.

“Enough is enough. We urgently need the Bank and the government to work together on a serious plan to calm markets.

“At the moment, we still have the central bank trying to hit the brakes whilst the government is trying to hit the accelerator. The result? Chaos …

“The UK faces the threat of significant, extended financial instability unless the Bank of England and the UK government work together on a long-term plan to calm markets.

“The current last-minute, panic mode approach that’s being taken is highly damaging to the UK’s economic prospects.”