Fire-fighting BoE buys inflation-linked bonds

The Bank of England again sought to stem a sharp sell-off in Britain’s 2.1 trillion pound ($2.3 trillion) government bond markets on Tuesday, expanding its emergency buying to inflation-linked debt.

Citing a “material risk” to financial stability after pension firms were hit by the turmoil, the BoE split its programme to buy up to 10 billion pounds of British gilts each day to include up to 5 billion pounds of index-linked bonds.

This marked the BoE’s fifth attempt to quell market turmoil in just over two weeks, including verbal interventions, and marked another embarrassment for Prime Minister Liz Truss whose economic agenda last month sent investors heading for the exit.

Inflation-linked gilts, typically held by pension funds and known in the market as linkers, suffered another significant sell-off on Monday as the end to the BoE’s programme approached. “The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” the BoE said in a statement. “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”

A pensions industry group urged the BoE to extend its bond-buying support beyond its Oct. 14 deadline, and possibly beyond the end of this month.

“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,” the Pensions and Lifetime Savings Association said.

Pension funds have scrambled to raise cash since finance minister Kwasi Kwarteng sparked a bond rout on Sept. 23 when he announced the government’s plans for unfunded tax cuts.

The funds were forced to stump up emergency collateral in liability-driven investments (LDI), which use derivatives to hedge against shortfalls in pension pots, after British government bonds dropped sharply in value.

Many did so by selling gilts, sparking a vicious cycle of falling prices that forced the BoE to pledge to buy as much as 65 billion pounds of long-dated government bonds between Sept. 28 and Oct. 14.

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