BofE extends gilt purchase operations to index-linked gilts

The Bank of England (BofE) has announced plans to widen the scope of its daily gilt purchase operations to include purchases of index-linked gilts, as a “further backstop to restore orderly market conditions”.

The additional measures, which will run from 11 October to 14 October, are expected to temporarily absorb the selling of index-linked gilts in excess of market intermediation capacity.

The BofE previously announced plans for temporary and targeted purchases in the gilt market in an effort to prevent a "self-reinforcing spiral", after gilt yields surged following the Chancellor's mini-Budget.

These measures aimed to enable liability driven investment (LDI) funds to address risks to their resilience from volatility in the long-dated gilt market, which the Bank suggested LDI funds have made "substantial progress" in doing.

However, the BofE pointed out that beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts, warning that dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, poses a "material risk to UK financial stability".

The Bank therefore announced plans for additional index-linked gilt purchases, which will be time-limited and fully indemnified by HM Treasury.

It stated that the pricing of this additional operation will reflect its nature as a backstop and that this is not a monetary policy instrument.

The BofE also confirmed that the total size of these auctions will be kept under review, having yesterday (10 October) announced plans to double the daily buying limit of its bond intervention from £5bn to £10bn.

The latest announcement from the BofE has been welcomed by the Pensions and Lifetime Savings Association (PLSA), which highlighted the plans as "a positive additional intervention".

The association suggested that the Bank's early intervention has proven "generally effective", with far lower levels of gilts being purchased than provided for – around £5bn out of a facility of up to £65bn.

"Recent days have, however, shown that market confidence remains low," the PLSA clarified, confirming that the association has been engaging with regulators to help manage the situation.

It continued: "We continue to encourage all pension funds and service providers to use this period to take further steps to re-balance portfolios and ensure necessary measures are in place to protect their strategies in uncertain times.

"Going forward, we will continue to work with relevant authorities to understand any lessons learned and to ensure the LDI market, which in general has provided UK schemes and UK Plc with significant amounts of stability over the last 20 years, remains resilient and effective. LD

"Over the last couple of weeks, pension funds also have taken steps to strengthen further their financial resilience."

However, the PLSA said that the end of the BofE's intervention has been a key concern amongst pension schemes, with particular concerns that the operation could be ended too soon.

"For example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility," it stated.

Regulators and the BofE have been “closely monitoring” the progress of LDI funds after market volatility prompted public concerns over the safety of pension benefits.

This concern also prompted MPs to write to The Pensions Regulator to seek an update on the recent challenges faced, querying whether the regulator should have taken stronger action earlier.

Broader concerns have also emerged, particularly over the impact of recent market volatility on lifestyling funds, the bulk purchase annuity market, and the push for infrastructure investment.

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