The Bank of England intervenes again in the bond markets and warns of a “material risk” for the financial stability of the United Kingdom

The Bank of England intervenes again in the bond markets and warns of a "material risk" for the financial stability of the United Kingdom
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The Bank of England raised rates by 0.5 percentage point on Thursday.

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

The central bank said it will expand its purchases of UK government bonds, known as gilts, to include index-linked gilts from October 1. 11 to Oct. 14. Index linked gilts are bonds where payments to bondholders are compared in line with the UK retail price index.

The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after increased the limit for your daily gilt purchases on Monday before the scheduled end of the buying scheme on Friday.

The Bank launched its emergency intervention on September 1. 28 after an unprecedented sell-off in long-term UK government bonds threatened to collapse multiple liability driven investment (LDI) fundslargely in the hands of UK pension plans.

“The start of this week has seen a significant appreciation in UK government debt, particularly index-linked gilts. The dysfunction in this market and the prospect of a self-reinforcing ‘fire-sale’ dynamic It poses a material risk to the financial stability of the UK.” the bank said in a statement on Tuesday.

Indexed 10-year UK government bond yields rose 64 basis points on Monday, representing a massive 5.5% drop in price. Meanwhile, 30-year indexed gold prices fell 16% on the day, with yields now around 1.5%, down from -1.5% just six months ago. Yields move inversely to prices.

Movements of this magnitude are very unusual in the sovereign bond markets of the developed world.

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“These additional operations will act as additional support to restore orderly market conditions by temporarily absorbing the sale of index-linked gilts that exceed the trading capacity of the market,” the bank said on Tuesday.

“As with conventional gilt purchases, these additional purchases of index-linked gilts will be time-limited and fully compensated by HM Treasury.”

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

The size of the auctions will remain under review, the Bank said, and all purchases will “take place in a calm and orderly manner once risks to the functioning of the market are deemed to have subsided.”

Reaction in UK bond markets was muted after the announcement. The 10-year gilt yield fell to 4.426%, while the 30-year yield was broadly flat at 4.713%.

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