Bank of England intervenes in bond markets again, warns of ‘material risk’ to UK financial stability

LONDON — The Bank of England on Tuesday announced an expansion of its emergency bond-buying operation as it looks to restore order to the country’s chaotic bond market.

The central bank said it will widen its purchases of U.K. government bonds — known as gilts — to include index-linked gilts from Oct. 11 until Oct. 14. Index-linked gilts are bonds where payouts to bondholders are benchmarked in line with the U.K. retail price index.

The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme on Friday.

The Bank launched its emergency intervention on Sep. 28 after an unprecedented sell-off in long-dated U.K. government bonds threatened to collapse multiple liability driven investment (LDI) funds, widely held by U.K. pension schemes.

“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,” the bank said in a statement Tuesday.

U.K. 10-year index-linked gilt yields rose by 64 basis points on Monday, representing a massive 5.5% fall in price. Meanwhile 30-year index-linked gilt prices were down 16% on the day, with yields now at around 1.5%, having been at -1.5% just six months ago. Yields move inversely to prices.

Moves of this magnitude are highly unusual in developed world sovereign bond markets.

“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,” the Bank said Tuesday.

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

On Monday, the Bank set the upper limit of its daily gilt purchases at £10 billion ($11 billion), of which up to £5 billion will be allocated to conventional gilts and £5 billion to index-linked gilts.

The size of auctions will remain under review, the Bank said, and all purchases will be “unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.”

The reaction in U.K. bond markets was muted following the announcement. The 10-year gilt yield slipped to 4.426% while the 30-year yield was roughly flat at 4.713%.