The Bank of England has ramped up its UK bond-buying plan to ease the mini-budget market turmoil as it looks to avoid a cliff-edge when the programme draws to a close on Friday.
The Bank said it will double the daily limit on its gilt-buying programme to £10 billion as part of measures to ensure an “orderly end” to the plan in its final week.
It comes amid fears the October 14 deadline set by the Bank for the bond-buying scheme could see a return to the pension fund woes that left some on the brink of collapse and threatened to spill over into the wider financial system.
The announcement, which was made before markets opened, was followed shortly afterwards by Chancellor Kwasi Kwarteng’s move to bring forward the publication of his financial strategy and independent economic forecasts to October 31.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said it was a “two-pronged attempt to calm markets”.
However, the battered pound failed to find comfort, falling back to 1.105 US dollars, having reached 1.111 at one stage, as markets remained concerned over the Chancellor’s unfunded tax cuts.
Threadneedle Street said that as well as boosting the daily limit on purchases of UK Government debt, it will also launch measures including a new short-term funding facility to address the pension fund liquidity crisis that will run beyond the end of the week.
It had so far offered to buy £40 billion worth of UK Government bonds – known as gilts – but only purchased around £5 billion under the £65 billion programme.
The central bank was forced to intervene with emergency action late last month when the mini-budget market chaos caused the pound to tumble and yields on gilts to soar, which left some pension funds across the industry close to collapse.
It laid bare the scale of the woes last week when it said the scheme helped the UK narrowly avoid a market meltdown caused by concerns over the Chancellor’s tax cut plans.
The market turmoil had forced pension funds to sell gilts to head off worries over their solvency, but this was threatening to see them suffer severe losses and was creating a downward spiral in gilt prices as more were offloaded.
Investment banks made calls on so-called liability driven investment (LDI) funds, which in turn called on pension funds, forcing them into a fire sale of gilts, driving prices still lower and yields higher.
The Bank said its move to step in on September 28 was designed to help support pension funds and prevent “contagion” in the wider financial system that could impact on borrowing for households and businesses.
The gilt-buying plan immediately sent yields on the bonds lower and allowed these LDI funds time to address risks to their financial resilience – and raise needed collateral.
The Bank of England will 'launch a facility that will run beyond the end of this week, designed to allow banks to ease #liquidity pressures faced by liability-driven investment funds.'
After years of ultra-low #yields, the financial system can't handle rising interest rates. pic.twitter.com/uuKCotHuMj
— jeroen blokland (@jsblokland) October 10, 2022
It said on Monday these funds “have made substantial progress in doing so over the past week”.
Its new short-term lending facility also unveiled on Monday has seen the Bank allow a broader range of collateral, such as corporate bonds, to prevent a forced sale of gilts and ease liquidity pressures on pension funds.
The Bank added: “Beyond the end of this week’s operations, the Bank will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future.”
Yields on long-dated gilts have risen back up in recent days, standing at 4.5% on Monday and the highest level since the Bank stepped in on September 28.
Ms Streeter said: “Policymakers and politicians are clearly nervous about seeing a repeat of the mini-financial crisis unleashed following the presentation of the Truss administration’s slash and spend plans, and fresh moves are being made to try and repair the damage.”
She said there was “still much scepticism about the Government’s plans just as Kwasi Kwarteng prepares to head to the International Monetary Fund’s annual conference where his policies are set for fresh scrutiny”.