Bank of England expands bond buying to avoid ‘fire sale’

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The Bank of England stepped in with another emergency intervention in the markets on Tuesday in an attempt to stave off a “fire sale” of UK government bonds by pension funds.

In the second update for its bond-buying scheme in as many days, the Bank said it would expand its operations to include purchases of index-linked gilts, a type of UK government bond that tracks inflation.

Threadneedle Street said it was taking the step to further increase its emergency programme, which is due to expire on Friday, after a “significant repricing” for UK government debt this week.

UK government borrowing costs rose sharply on Monday to the highest levels since the financial market chaos triggered by Kwasi Kwarteng’s mini-budget in September, despite renewed efforts by the to smooth over the turmoil.

The central bank was forced to step in late last month amid a dramatic sell-off for long-dated government debt, with a promise to buy up to ?65bn in UK government bonds in a scheme running until 14 October to ease market turmoil.

In the final week of the scheme, the Bank warned there were still financial stability risks for pensions funds in “liability driven investment” schemes, which have been caught out by the dramatic rise in UK government bond yields since the chancellor’s mini-budget.

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

Sir John Gieve, a former member deputy governor of the Bank of England, said the moves on the bond markets on Monday must have “alarmed” the central bank, prompting Tuesday’s action.

The move by the Bank to include purchases of index-linked gilts comes after it said on Monday it would loosen the criteria of the scheme. It had promised to increase the capacity of its programme to ?10bn a day from a previous level of ?5bn to ensure there was sufficient capacity in the market before the end of the programme. The Bank has however used limited amounts of this overall capacity, buying less than ?6bn out of its ?65bn potential total so far.

Threadneedle Street said the enhancement of its programme to include index-linked gilts would run until 14 October, when its emergency intervention would still end as planned.