BoE to buy inflation-linked bonds to tackle market ‘dysfunction’

LONDON (Reuters) – The Bank of England acted again on Tuesday to stem a collapse in Britain’s 2.1 trillion pound ($2.31 trillion) government bond market by announcing a move to purchase inflation-linked debt.

Citing a “material risk” to financial stability from a rout in British government bonds – known as gilts – the BoE said it would buy up to 5 billion pounds of index-linked debt per day from Tuesday until the end of the week.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the BoE said in a statement.

The announcement comes a few hours before Britain will attempt to sell 900 million pounds of a linker due in 2051 and follows another sharp selloff in UK bond markets on Monday.

MARKET REACTION:

FOREX: Sterling was last down 0.2% on the day at $1.1043.

BONDS: British gilt yields fell in early trade with 10-year bond yields down 8 basis points at 4.41%. The 10-year inflation-linked bond yield was down almost 20 bps at around 1.16%.

COMMENTS:

STEPHEN INNES, MANAGING PARTNER, SPI ASSET MANAGEMENT, HONG KONG

“The Bank of England is in the market again but buying linkers this time around. These additional operations will act as a further backstop to restore orderly market function by temporarily mopping up the selling of index-linked gilts that exceeds the market’s immediate capacity.

“On Monday, the 30-year linker yield rose 54 bps – a record one-day rise, so most of the pressure on nominals yesterday was related to index-linked selling. The linker market is niche but reflects the continued unwind of leverage and portfolio rebalancing ahead of the LDI (liability-driven investments).”

LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON

“The BoE has just announced as well that it will start to purchase index-linked gilts. Beyond this week, market participants will then speculate over whether the BoE still intends to carry on with plans to actively sell their gilt holdings from the end of this month which could already be adding to upward pressure on yields in the near-term.

“The renewed move higher for yields in the UK debt market will increase pressure on the government to take further policy action to restore investor confidence in the public finances.”

ANTOINE BOUVET, SENIOR RATES STRATEGIST, ING, LONDON

“Helpfully, the announcement came alongside the launch of a repo facility accepting a broader range of assets as collateral.

“The idea is that instead of being forced sellers of, say, corporate bonds due to growing margin requirements, pension funds could instead pledge them as collateral to obtain financing. The facility will be in place for one month.

“This should be viewed as a complement to support the gilt market, not as a replacement, as a gilt sell-off.. could still generate margin calls that exceed the fund’s funding capacity.”

MARC OSTWALD, CHIEF GLOBAL ECONOMIST, ADM INVESTOR SERVICES, LONDON

“Inevitably it’s spread to gilts because they’re at the heart of this whole LDI storm. We are back with a good old-fashioned solvency crisis.

“The problem is: one, you’re trying to work out how much you need to raise in the way of collateral to meet your LDI margin call, because that’s basically what this is, and two, you’ve got the sort of volatility at the long end of the gilt market – we’ve done a 360 basis point round trip on the 30-y gilt yield since Sept 16. You might not even see that in two decades, let alone in less than four weeks. That’s fundamentally the problem.”

HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBERG, LONDON

“The Bank of England has demonstrated with its recent temporary pivot that they are highly aware of market volatility and they are able to dampen it. So, I expect the interventions to work.

“But the need for them to intervene is a sign of how unsettled UK markets are in the wake of Trussonomics.

“It is a bit of a surprise (buying linkers).

“But they might intervene in various parts of the markets that are unsettled and that is partly a reflection of how the rate the exposure of major players.”

 

(Reporting by London Markets Team; Editing by Andrew Heavens and Alexander Smith)