Firefighting Bank of England forced to buy inflation-linked bonds

The Bank of England acted again on Tuesday to stem a sharp sell-off in the £2.1 trillion ($2.31 trillion) UK government bond market by restricting purchases of inflation-linked bonds until the end of this week announced.

Noting a “material risk” to financial stability stemming from a flight in UK government bonds – known as gilts – the BoE said it would bid up to £5 billion ($5.51 billion) in index-linked bonds from Tuesday buy debt a day.

Instead of the existing obligation to purchase government bonds worth up to 10 billion

The move and mounting warnings from the central bank pose further embarrassment for Prime Minister Liz Truss, whose economic agenda last month sparked a collapse in international investor confidence in British assets.

UK inflation-linked gilts — known as linkers — suffered a massive sell-off on Monday, even as the BoE doubled the maximum size of its buybacks of traditional long-dated gilts.

“Earlier this week saw another significant repricing of UK government bonds, particularly index-linked gilts,” the BoE said in a statement.

“A dysfunction in this market and the prospect of self-reinforcing ‘fire sale’ momentum pose a significant risk to UK financial stability.”

UK government bond investors are worried about what will happen to the market after most of the BoE’s emergency bailout measures expire on Friday.

Index-linked gilts are typically held by pension funds that have been scrambling to raise money after Finance Minister Kwasi Kwarteng sparked a bond crisis last month with plans for unfunded tax cuts.

Pension funds have been forced to replenish emergency collateral in liability-driven investments (LDI), which use derivatives to hedge against pension fund shortages, after UK government bond yields soared.

To stop prices from falling freely, the BoE was forced to buy up to £65 billion ($73.63 billion) of long-dated government bonds, known as gilts.

Tuesday’s announcement comes hours before Britain’s Debt Management Office will attempt to sell a £900million linker due 2051 on the market. Firefighting Bank of England forced to buy inflation-linked bonds

Fry Electronics Team

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