The Bank of England intervenes in bond markets again, warning of a ‘fire sale’ risk to stability after gilt yields spike

  • The Bank of England has added index-linked gilts to its emergency bond-buying program to calm markets.
  • It’s the second time in just two days that the BoE has stepped in, after a selloff in UK government bonds.
  • The UK central bank warned that soaring gilt yields could lead to a “fire sale” and threaten financial stability.

The Bank of England has stepped in to calm bond markets for the second time in just two days, warning that soaring gilt yields could pose a “fire sale” risk to the UK’s financial stability.

The UK’s central bank said Tuesday that it will buy up to 5 billion pounds ($5.52 billion) of index-linked gilts a day until the end of this week. Index-linked gilts are UK government bonds that pay interest in line with the rate of inflation.

“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” the BoE said in a statement Tuesday.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”

The move comes after 10-year index-linked gilts suffered a huge selloff Monday, as yields soared 64 basis points to hit 1.24% for their largest daily rise in three decades. Yields move inversely to prices.

At the same time, the yield on the 10-year gilt rose 24 basis points to 4.470% Monday, and the 30-year gilt — included in the BoE’s emergency bond-buying program — shot up 29 basis points to 4.677%.

Tuesday’s intervention is the second time in one week that the BoE has stepped in to try to calm markets. But the bank’s widening of its emergency bond buying is unlikely to do the job, analysts said.

“The fact the Bank of England has widened its support measures for the market by including index-linked gilts in its programme of government bond purchases will only serve to worry investors even more,” AJ Bell investment director Russ Mould said.

At last check Tuesday, 30-year gilt yields were up about 5 basis points at 4.747%, while 10-year gilt yields were broadly unchanged at 4.462%.

There were also signs Tuesday that the gilt market rout was affecting US Treasurys. 30-year bond yields jumped as much as 11 basis points to a nine-year high of 3.956% when trading resumed after Monday’s Columbus Day holiday.

London’s FTSE 100 index fell 1.35% early Tuesday, while the British pound was down 0.05% at $1.1051 at last check.

Less than two weeks ago, the central bank started temporarily buying long-dated UK government bonds after gilt yields surged and the British pound hit an all-time low. Its aim is to stabilize financial markets rattled by a loss of investor confidence after the new UK government said it planned huge debt-funded tax cuts.

But the BoE was forced to intervene again Monday, as market dysfunction persisted. It said it would ramp up the maximum value of its daily purchases and fortify liability-driven investments funds (LDIs), linked to a potential risk to UK pensions.

The bank and the UK government have struggled to reassure investors rattled by the selloff in British debt markets.

UK’s finance minister Kwasi Kwarteng will need to cut debt by around 60 billion pounds ($66 billion) to fund his pledges, the Institute for Fiscal Studies said Tuesday. Political pressure has forced Kwarteng to bring forward the publication of details of his plan to October 31 from November 23.

If the BoE’s move Tuesday fails to have the desired effect, the bank may have to carry on with its emergency program, Mould said.

“The key sticking point is that the support measures are only scheduled to last until Friday,” the AJ Bell strategist said. “Will that be long enough, or will the Bank of England extend the support scheme?” 

“Extending it could go one of two ways — the market either applauds the move and breathes a sigh of relief or it gets even more worried, thinking that the extra time suggests the crisis is more severe than originally thought,” he added.

Read more: The Bank of England is ramping up its daily bond purchases and boosting liquidity to banks after the UK’s bond-market meltdown

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