The Bank of England (BOE) yesterday acted again to stem a sharp sell-off in Britain’s ￡2.1 trillion (US$2.31 trillion) government bond market by announcing the purchase of inflation-linked debt until the end of this week.
Citing a “material risk” to financial stability arising from a rout in British government bonds — known as gilts — the central bank said that it would buy up to ￡5 billion of index-linked debt per day, starting yesterday.
Rather than increase the existing commitment to buy up to ￡10 billion of gilts each day, as announced on Monday, the purchases would run alongside existing purchases of long-dated conventional bonds, now worth up to ￡5 billion.
Photo: Reuters
The move and the increased warnings from the central bank came after British Prime Minister Liz Truss last month announced an economic agenda that was followed by a collapse in international investor confidence toward British assets.
There was a massive sell-off on Monday of British inflation-linked gilts — known as linkers — despite the bank doubling the maximum size of its buy-backs of conventional long-dated gilts.
“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” the bank 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,” it added.
Investors in British government debt are worried about what will happen to the market after most of the Bank of England’s emergency support measures end on Friday.
Index-linked gilts are typically held by pension funds, which have been scrambling to raise cash after British Chancellor of the Exchequer Kwasi Kwarteng last month sparked a bond rout with plans for unfunded tax cuts.
Pension funds were forced to stump up emergency collateral in liability-driven investments, which use derivatives to safeguard against shortfalls in pension pots, after British government bond yields rocketed.
To halt freefalling prices, the central bank pledged to buy as much as ￡65 billion of long-dated gilts.
Yesterday’s announcement came a few hours before the British Debt Management Office was to attempt to sell ￡900 million of a linker due in 2051 into the market.
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