Central Bank insists it will end bond-buying programme Friday

The cost of government borrowing in England has continued to soar, even with the Bank of England insisting that its emergency bond-buying programme will end on Friday (October 14) as planned.

This commitment comes in spite of claims that the BOE was considering an extension.

Earlier this week, Our Today reported that the BOE was again 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, the price of 20-year UK bonds hit new lows, sending their interest rates to levels last seen in 2002, after BOE said it would put a hard stop to its £6-billion package of support for the bond market. The Bank was forced to intervene on September 28, promising to spend up to £5 billion a day buying government debt, after unfunded tax cuts announced as part of the mini-budget sent the pound and UK bond prices plunging, stoking a liquidity crisis among pension funds.

 Now, the BOE has doubled down on Governor Andrew Bailey’s insistence that the bond-buying programme will end on Friday, despite concerns that market turmoil would continue beyond its deadline and that it has created a cliff edge.

However, overnight, the Financial Times reported that the central bank was in contact with commercial lenders to signal it was ready to extend the scheme as necessary. The Bank’s latest statement appears to contradict those reports.

The decision to close the scheme is meant to pressure pension funds to raise tens of billions of pounds to build up cash buffers and ensure they are protected against future shocks in the value of government bonds after the Bank withdraws its support. The BOE expects demand to increase towards the end of the week as pension funds caught out by recent market turmoil rebalance their portfolios.

MARKET TURMOIL COULD CONTINUE BEYOND FRIDAY DEADLINE

There are concerns that market turmoil could continue beyond the Bank’s Friday deadline, resulting in a further spike in government bonds yields and forcing another fire sale of assets by pension funds involved in so-called liability-driven investment (LDI) schemes. The Bank has already expanded its bond-buying programme twice in as many days this week.

On Monday, the BOE reported that it was doubling the value of bond purchases it was prepared to make each day from £5 billion to £10 billion, and yesterday it extended the scheme to buying a wider range of bonds, including index-linked gilts.

As markets closed on Tuesday, the Threadneedle Street-located institution explained that it had spent £3.3 billion buying up bonds, marking an increase in the Bank’s spending, which had totalled £5 billion over the first eight days of the scheme. However, that is still far short of the potential £5 billion a day the Bank had said it could spend.