The Bank of England intervened once more on Tuesday to halt a dramatic sell-off in the UK’s 2.1 trillion-pound ($2.31 trillion) government bond market, announcing the purchase of inflation-linked debt until the end of this week.
The Bank of England said it will buy up to 5 billion pounds ($5.51 billion) of index-linked debt every day beginning Tuesday, citing a “material risk” to financial stability from a sell-off in British government bonds, known as gilts.
Rather than increase the existing commitment to buy up to 10 billion pounds of gilts each day, as announced on Monday, the purchases will run alongside existing purchases of long-dated conventional bonds, now worth up to 5 billion pounds.
The move and the increased warnings from the central bank represent another embarrassment for Prime Minister Liz Truss, whose economic agenda last month sparked a collapse in international investor confidence towards British assets.
British inflation-linked gilts – known as linkers – suffered a massive sell-off on Monday, despite the BoE doubling the maximum size of its buy-backs of conventional long-dated gilts.
“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts,” the BoE said in a statement.
“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”
Investors in British government debt are worried about what will happen to the market after most of the BoE’s emergency support measures end on Friday.
Index-linked gilts are typically held by pension funds which have been scrambling to raise cash after finance minister Kwasi Kwarteng last month sparked a bond rout with plans for unfunded tax cuts.
Pension funds were forced to stump up emergency collateral in liability-driven investments (LDI), which use derivatives to safeguard against shortfalls in pension pots, after British government bond yields rocketed.
To halt freefalling prices, the BoE was forced to pledge to buy as much as 65 billion pounds ($73.63 billion) of long-dated government bonds, known as gilts.
Tuesday’s announcement comes a few hours before Britain’s Debt Management Office will attempt to sell 900 million pounds of a linker due in 2051 into the market.