The Bank of England has announced it will now offer to buy up to £10 billion of gilts per day, as its £65 billion emergency bond-buying plan is set to expire on Friday October 14.
Threadneedle Street intervened to prop up the Government bond market in the wake of Kwasi Kwarteng’s mini budget.
The mini-budget sparked a sell-off for gilts, which led some large pension funds in the UK to being close to collapse.
Repricing of UK assets
The pound dropped to its all-time lowest level of $1.0327 and gilts saw record falls before the Bank of England stepped in.
The Bank of England said today, “Against the backdrop of an unprecedented repricing in UK assets, the Bank announced a temporary and targeted intervention on Wednesday 28 September to restore market functioning in long-dated government bonds and reduce risks from contagion to credit conditions for UK households and businesses.
“In line with the Bank’s financial stability objective and in order to avoid dysfunction in core funding markets, the purpose of these operations is to enable liability driven investment (LDI) funds to address risks to their resilience from volatility in the long-dated gilt market. LDI funds have made substantial progress in doing so over the past week.”
Gilt intervention
Tom Selby, head of retirement policy at AJ Bell said “The Bank of England has further loosened its daily gilt buying purse strings as it prepares to wind up the dramatic intervention it first announced on 28 September.
“In addition, it has set out its plan beyond this Friday, when it will stop buying gilts, with a clear-eyed focus on maintaining order in the market and preventing a ‘death spiral’ of forced gilt sales from UK pension funds.
“However, there remains huge uncertainty over the adjustment period once the Bank steps back from its emergency intervention. It will no doubt be crossing its fingers that the certainty it has attempted to provide today will ensure calm is restored to the market.”
