- Monday saw the Bank of England announce a trio of steps to stabilize rocky markets.
- The central bank is increasing its daily bond purchases and making liquidity more available to banks.
- After gilt yields soared to 120-year highs, the BoE initiated a temporary bond buying program.
As part of a temporary measure to ease the situation, the Bank of England announced that it will increase its emergency purchases of UK government bonds. Financial stress on pension funds.
The UK’s central bank AnnouncedAs it scrambles for stability in the UK’s “gilt” market, and to protect liability-driven investments (LDI) funds from further volatility in long term gilts, Monday saw a trio of actions.
With an auction of as high as 10 billion pounds ($11billion per day), it plans to increase the long-dated bonds purchased this week. It will also make cash more available to banks that have LDI clients as well as maintain its weekly liquidity program.
The BoE You are now embarkedOn September 28, the emergency bond-buying program was launched after gilt yields reached 14-year-highs and the British pence plunged. Investors reacted to unexpected tax cuts that lowered confidence in the UK’s prospects, causing market turmoil.
The central bank is concerned that allowing the market dysfunction to continue or worsen would pose a “material risk to financial stability.” According to its officials, allowing yields rise higher would tighten the financial environment and dry up credit for UK households.
Online commentary by Nick Cawley, Daily FX strategist, stated that “the BoE is offering excessive quantities of liquidity to market ahead of Friday’s end of the gilt purchasing program”.
At last check, 10-year gilts rose 9 basis points to 4.32% while 2-year gilts rose 8 basis points to 4.20%. After the news, the British pound rose to $1.1112 at first. However, it is down now by 0.36% to $1.1053.
The BoE announced that it would buy up to 5 Billion pounds of long-dated gilts per day for 13 days. This makes the total purchase amount to 65 Billion Pounds. Although it has held eight auctions so far, it has only spent 5 Billion pounds on the 40 Billion pounds.
“The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5bn in each auction,” the BoE said in a statement.
The central bank is stepping in to support UK pension funds after many were hit by rising bond yields and have been subject to margin calls. A BoE official in charge said £1 trillion in UK pension fund investmentsCould have been lost if it wasn’t for the bank to intervene.
It has launched a Temporary Expanded Collateral Repo Facility. (TECRP), which is intended to provide cash in return for gilts to banks whose clients manage LDI money. It will accept a wider range of collateral than normal, including corporate bonds.
