The Bank Of England Intervenes For the Second Time In 24 Hours

The Bank Of England Intervenes For the Second Time In 24 Hours
Reda Farran, CFA

over 1 year ago2 mins

The volatility that’s held sway over the UK's bond market and its currency is showing zero signs of letting up. It all started last month, when the British government announced a series of debt-funded tax cuts and then embarrassingly reversed course ten days later, after a historic selloff in bonds created a catastrophic situation for the UK’s pension funds, which own truckloads of the asset class. The Bank of England (BoE) was forced to perform an emergency intervention amid all the melee, pledging to buy up to £5 billion ($5.5 billion) worth of government bonds every day until October 14th (this Friday) to keep those pension funds from going bust.

Those measures did help restore order to the bond market, at least for a while, but selling picked up strongly again on Monday as investors worried about the program’s looming end. That caused the BoE to intervene again, announcing that it’s doubling the upper limit of its daily bond purchases to £10 billion ($11 billion). It also created a new lending facility that allows banks to offer up a wider variety of instruments as collateral in exchange for short-term funding, with the hope that this would trickle down to their pension fund clients, buying them more time. But the moves failed to reassure the market and did little to reverse the selling. Inflation-linked debt was the worst hit, with the yield on 10-year inflation-linked bonds nearly doubling, climbing to 1.24% – for its biggest single-day rise on record (black lines, above).

That huge selloff in inflation-linked debt – a market dominated by UK pension funds – prompted the BoE to intervene again on Tuesday. It kept the upper limit of its daily bond purchases intact at £10 billion, but said it would buy as much as £5 billion a day in conventional bonds and £5 billion in inflation-linked ones until the program expires on Friday. While that might help stem losses at the country’s pension funds, the policy of repeated interventions in response to selloffs without a long-term plan in place is unnerving for investors and it’s denting the BoE’s credibility. Time will tell how this entire episode plays out, with things potentially getting uglier after the temporary bond-buying measures expire in just a few days...

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