Bank of England expands emergency bond buying as market turmoil returns

The Bank of England has stepped up its emergency bond-buying scheme for a second day running as it warned the ongoing rout in the gilts market poses a “material risk to UK financial stability”.

The Bank said it will now widen the scope of its UK government bond-buying programme, which was launched in the wake of the mini-budget market turmoil, to include purchases of index-linked UK government bonds amid concerns over another “fire sale” of gilts.

It comes after the sell-off in government bonds – also known as gilts – resumed on Monday as investor concerns failed to subside despite action by the Bank of England to double its daily bond-buying limit and Chancellor Kwasi Kwarteng’s move to bring forward his new fiscal plan and independent economic forecasts to October 31.

The Bank warned: “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.”

It added that its latest efforts will “act as a further backstop to restore orderly market conditions”.

It previously intervened with emergency action on September 28 when the mini-budget market chaos caused the pound to slump to a record low while government borrowing surged, causing some pension funds to be at risk of collapse.

The Bank laid bare the scale of the woes last week when it said the scheme helped the UK narrowly avoid a market meltdown caused by concerns over the Chancellor’s tax cut plans.

But gilt yields started to surge once more due to ongoing fears over the Government’s economic policies and worries that the October 14 deadline set by the Bank for its bond-buying scheme could see a return to pension fund woes.

The Bank ramped up its emergency action on Monday to avoid a cliff-edge when the programme draws to a close on Friday.

It doubled the daily limit on its gilt-buying programme to £10bn as part of measures to ensure an “orderly end” to the plan in its final week.

The latest efforts on Tuesday to broaden the bond purchases will further help by “temporarily absorbing selling of index-linked gilts”, according to the Bank.

It added: “The Bank continues to monitor developments in financial markets very closely in light of the significant asset repricing of recent weeks.

“It has also been working with the UK authorities to address risks to the resilience of liability driven investment (LDI) funds arising from volatility in the long-dated government bond (gilt) market.”