Fifth attempt to quell market turmoil in just over two weeks

The Bank of England (BOE) has again been forced to buy more inflation-linked debt, as it seeks to stem a sharp sell-off in Britain’s £2.1 trillion (US$2.3 trillion) government bond markets today (October 11).

Inflation-linked gilts, typically held by pension funds and known in the market as linkers, suffered another significant sell-off today, as the end to the BOE’s programme approached. The BOE has expanded its emergency buying to inflation-linked debt.

This marked the BOE’s fifth attempt to quell market turmoil in just over two weeks, including verbal interventions. Reuters is reporting that this latest state of affairs has marked another embarrassment for Prime Minister Liz Truss, whose economic agenda last month sent investors heading for the exit.

Risk to financial stability

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 of British gilts each day to include up to £5 billion of index-linked bonds.

In a statement, the BOE explained: “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.”

A pensions industry group urged the British Central Bank to extend its bond-buying support beyond its October 14 deadline and possibly beyond the end of this month. Pension funds have scrambled to raise cash since Finance Minister Kwasi Kwarteng sparked a bond rout on September 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. Reuters reports that 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 of long-dated government bonds between September 28 and October 14.

“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,” Britain’s Pensions and Lifetime Savings Association said. Some long-dated inflation-linked gilts have lost more than 75 per cent.

Investors in British government debt are worried about what will happen to the market after most of the BOE’s emergency support measures end.

“Eventually, the gilt sell-off could force the BOE back into the market,” wrote Antoine Bouvet, strategist at ING, in a research note titled The never ending gilt calamity.

Simeon Willis, chief investment officer of pension consultants XPS, said he had seen pension funds selling “across the board” to find liquidity.

“We have seen some property funds respond to that, we have seen credit spreads widen, we have seen equities fall – we have seen them coming out of all asset classes,” he added.