The Bank of England is widening the scope of its daily gilt purchase operations also to include purchases of index-linked gilts.
Index-linked gilts are bonds with borrowing rates and principal payments linked to changes in the inflation rate.
The Bank said: “These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity.
“As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury. The Bank has also consulted with the Debt Management Office.
“As announced on 10 October, the Bank stands ready to purchase up to £10bn of gilts each day, of which up to £5bn will be allocated to long-dated conventional gilts and up to £5bn to index-linked gilts.”
Thank Bank of England has been running the gilt buying operation following market turmoil following the Government’s mini-Budget.
The operation is scheduled to end on Friday 14th October.
Reaction
Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management:
“Index-linked gilts had a very bad day on Monday, with yields rising by 64bps. The 30-year was down 16% on the day. These are illiquid bonds and just a few sellers can send prices crashing.
“The Bank of England has therefore been forced to include these in its bond buying programme. More generally, the Bank’s intervention hasn’t really worked in stabilising the bond market after the loss of confidence following the government’s mini-Budget.
“Weak international markets haven’t helped, either. Unfortunately this is having a real impact on mortgage rates, the economy and people’s lives. The mini-Budget has triggered a phenomenal amount of uncertainty in markets.”
Wes Wilkes, CEO at wealth managers IronMarket:
“I question whether this latest action from the Bank of England will have any effect and it’s arguably naive to believe that we will see an orderly end to its gilt purchase scheme. That said, Threadneedle Street has been put in an extremely difficult position by the Government’s policy messaging and whilst, ordinarily, a back-stop buyer feels supportive, this time it just feels desperate. Also, what stops the selling resuming once the back-stop is removed? The whole situation is a farce.”
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial:
“The response of the Bank of England underlines its flexibility when it comes to intervening in the bond market, which is good news. The not-so-good news is that it also shows how volatile the market is and the apocalyptic impact the Government’s ill-thought out mini-Budget and unfunded spending have had on gilts.
“It also highlights the dangers of using derivatives in cautious markets, and begs the question what the FCA and PRA were doing to allow such financial weapons of mass destruction to be used on workers pension schemes.”
Riz Malik, director of Southend-on-Sea-based R3 Mortgages:
“On Monday, it was announced that the long-awaited fiscal plan and OBR report were going to be shared on 31st October rather than 23rf November.
“However, this has done little to cool the Uk bond market. Trust and confidence need to be restored in UK Plc and the wording from the Bank of England highlights the severity of the situation.
“No central bank would use the term “material risk to stability” lightly. Volatility is likely to continue until 31st October when deep cuts are expected to balance the books and go towards repairing the damage caused in the past few weeks. The first few weeks of the new administration have been nothing short of a disaster in terms of the impact on markets.”
David Robinson, co-founder at London-based Wildcat Law:
“The Bank of England quite simply should not have to be buying Index Linked Gilts. Market demand for these usually outstrips supply so the fact they are having to buy them shows exactly how broken the market is.
“The Bank is desperately trying to put out fires that the Chancellor is lighting all over the City. However, they are only just keeping on top of things through some very creative approaches.
“Can the mature adults please take control of the Government’s economic policy and quickly? Never in the field of governance has one man crashed so much with so few words.”
Rob Gill, managing director at Altura Mortgage Finance:
“If Liz Truss really wants to channel Margaret Thatcher, she should note her famous saying, “You can’t buck the market”.
“The Bank of England can only do so much and its actions seem to be running out of steam. While U-turns on the 45% tax rate, involving the OBR and proposed spending reviews are a move in the right direction, Truss and Kwarteng will need to go much further, and much more quickly rather than rely on the Bank of England to bail them out.”
Edgar Rayo, chief economist at London-based finance broker, Finanze:
“The Bank of England’s quantitative easing measures benefit mortgage holders by pushing down gilt yields, with the intention of lowering the cost of borrowing.
“So, when UK pension funds that rely on LDIs were forced to sell down their positions when bond prices dropped, so they can continue paying people’s pensions with cash, the Bank of England had to step in to buy bonds and keep interest rates down.
“But be aware that this move is intended to buy the Bank of England time for them to initiate additional measures to reduce the turmoil in the market. Eventually, the central bank will have to revert to quantitative tightening.
“Given the volatility in the economy and expectations of further interest rate hikes, mortgage holders will be waiting a lot longer before rates show any sign of decreasing. With affordability still an issue, remortgaging will prove to be expensive for hundreds of borrowers whose fixed-rate mortgages are close to expiry.
“However, those with longer fixed terms will need to weigh if it is worth paying the penalty now for early termination to avoid paying even higher rates later on, if rates continue to rise. For new homebuyers, the only way to secure a mortgage is to remain in their jobs, establish their creditworthiness and prepare a higher deposit.
“Avoiding unnecessary spending on non-essential goods and services would also stand them in good stead.”
