"Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability."
After an unprecedented repricing in UK assets following the government's mini-budget, the Bank announced a temporary intervention on 28th September to "restore orderly market conditions", which included the purchase of long-dated UK government bonds.
In the final week of operations, the Bank announced that it will stand ready to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases ahead of Friday 14th October.
Yesterday, the Bank increased its capacity to buy £10bn worth of bonds a day, double the previous limit of £5bn. Of the £10bn, up to £5bn will be allocated to long-dated conventional gilts and up to £5bn to index-linked gilts.
The Bank still plans to end these operations and cease all gilt purchases on Friday 14th October.
In a statement today, the Bank said: "The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.
"These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity. As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury."
Philip Dragoumis, owner of Thera Wealth Management, commented: “Index-linked gilts had a very bad day on Monday, with yields rising by 64bps. The 30-year was down 16 percent on the day. These are illiquid bonds and just a few sellers can send prices crashing. The Bank of England has therefore been forced to include these in its bond buying programme. More generally, the Bank's intervention hasn’t really worked in stabilising the bond market after the loss of confidence following the government’s mini-Budget. Weak international markets haven’t helped, either. Unfortunately this is having a real impact on mortgage rates, the economy and people’s lives. The mini-Budget has triggered a phenomenal amount of uncertainty in markets.”
Wes Wilkes, CEO at wealth managers IronMarket, said: "I question whether this latest action from the Bank of England will have any effect and it's arguably naive to believe that we will see an orderly end to its gilt purchase scheme. That said, Threadneedle Street has been put in an extremely difficult position by the Government's policy messaging and whilst, ordinarily, a back-stop buyer feels supportive, this time it just feels desperate. Also, what stops the selling resuming once the back-stop is removed? The whole situation is a farce."
Samuel Mather-Holgate of advisory firm, Mather & Murray Financial, commented: "The response of the Bank of England underlines its flexibility when it comes to intervening in the bond market, which is good news. The not-so-good news is that it also shows how volatile the market is and the apocalyptic impact the Government's ill-thought out mini-Budget and unfunded spending have had on gilts. It also highlights the dangers of using derivatives in cautious markets, and begs the question what the FCA and PRA were doing to allow such financial weapons of mass destruction to be used on workers pension schemes."
Riz Malik, director of R3 Mortgages, added: "On Monday, it was announced that the long-awaited fiscal plan and OBR report were going to be shared on 31st October rather than 23 November. However, this has done little to cool the Uk bond market. Trust and confidence need to be restored in UK Plc and the wording from the Bank of England highlights the severity of the situation. No central bank would use the term "material risk to stability" lightly. Volatility is likely to continue until 31st October when deep cuts are expected to balance the books and go towards repairing the damage caused in the past few weeks. The first few weeks of the new administration have been nothing short of a disaster in terms of the impact on markets."
