Citing “material risks” to financial stability after pension firms were hit by the turmoil, BOE It split its program to buy 10 billion pounds of British gilts each day to include up to 5 billion pounds of index-linked bonds.
It marks the BoE’s fifth attempt to end the market turmoil, including verbal intervention, and marks yet another embarrassment for the prime minister. liz truss Whose economic agenda was prompting investors to exit last month.
Inflation-linked gilts, usually held by pension funds and known in the market as linkers, faced another significant selloff on Monday as the BoE’s program ended. “Earlier this week has seen another significant reassessment of UK government debt, particularly index-linked gilts,” the BoE said in a statement. “The laxity in this market, and the potential for self-reinforcing ‘fire sales’ dynamics, pose a significant risk to the financial stability of the UK.”
A pension industry group urged the BoE to extend its bond-buying support beyond the October 14 deadline and possibly beyond the end of this month.
“A major concern of pension funds since the intervention of the Bank of England has been that the purchase period should not end too soon,” said Pension and Lifetime Savings Association Told.
Pension funds scramble to raise cash since finance minister half quarteng A bond route began on September 23, when he announced the government’s plans to cut taxes for unfunded.
Funds in liability-driven investments were forced to stump up emergency collateral (LDI), which use derivatives to hedge against a reduction in pension pots, following a sharp drop in the value of British government bonds.
Many did this by selling gilts, creating a vicious cycle of falling prices that forced the BoE to buy 65 billion pounds of long-term government bonds between September 28 and October 14.