The Bank of England stepped up its intervention in Britain’s bond market Tuesday, the second expansion of its emergency measures in two days, as it warned of a “material risk” to the nation’s financial stability from dysfunction in part of the market.
For the past 2 1/2 weeks, Britain’s financial markets have faced turmoil after investors rebuffed the tax and spending policies of Prime Minister Liz Truss and her new government. The pound dropped to a record low and bond prices fell, which caused bond yields to surge, leaving many Britons facing higher mortgage rates.
The sharp rise in bond yields, especially for bonds with long maturities, left an investment strategy used by pension funds in disarray, as they were forced to sell bonds to raise cash for collateral. It was so bad that the Bank of England felt compelled to intervene by offering to buy bonds, and postponed its plans to sell off its debt holdings back to the market.
Initially, this helped bring bond yields down. But tumult has returned as traders wonder what will happen when the bond-buying operation ends Friday.
This week there has been a “further significant repricing” of government bonds, especially for inflation-linked bonds, the central bank said Tuesday.
“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to U.K. financial stability,” it added in a statement.
The bank said it still planned to end the bond-buying Friday but would add inflation-linked debt to the assets it was willing to buy — up to 20 billion pounds ($22.2 billion) — in the final week of the program.
The decision comes just a day after other efforts by the central bank and government to ease strain in markets.
Britain’s government said Monday that the date for its next fiscal policy announcement would be moved up nearly a month and that it would provide, at the same time, a much-anticipated independent assessment of the policies’ impact on the nation’s economy and public finances.
The chancellor of the Exchequer, Kwasi Kwarteng, said he would publish his “medium-term fiscal plan” on Oct. 31, which would show how the government would bring down debt levels despite large spending plans and tax cuts that would be funded by borrowing.
New economic and fiscal forecasts from the Office for Budget Responsibility, a government watchdog, are to be published the same day.
On Monday, the Bank of England tried to address a continuing dysfunction in bonds. It said it would expand its intervention in the bond market by increasing the size of the daily auctions in a bond-buying program and setting up other facilities to improve liquidity for the pension funds.
Over the first eight trading days of the bond-buying operation, the bank said Monday, it had bought only about 5 billion pounds of long-dated government bonds, despite setting a limit of 5 billion pounds a day. Before the program ended, it would increase the auction sizes and set up a new collateral facility to try to ease liquidity problems faced by the pension funds, which will continue beyond this week.
The announcement didn’t completely ease the markets. On Monday, Britain’s bond prices kept falling, while the yield on 30-year bonds rose to 4.72%, once again approaching highs seen during the worst of the bond rout after the last fiscal statement. But on Tuesday, after the latest intervention, yields were only slightly higher at 4.75%.
The pound was trading just below $1.11 on Tuesday, amid skepticism that the government’s plan would expand the economy as promised, and that instead large public spending cuts would be necessary.
The Pensions and Lifetime Savings Association said Tuesday that the central bank’s early intervention had been generally effective but “recent days have, however, shown that market confidence remains low.” It urged the bank to not end the bond-buying operation too soon, and said that many pension funds felt it should be extended at least until the end of the month.
This article originally appeared in The New York Times.
By Eshe Nelson
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