The Bank of England is bolstering support for beleaguered U.K. pension funds to try to underpin government bond markets and create “an orderly end” to its emergency bond-buying intervention on Friday.
The BoE took emergency action on September 28 by pledging to buy up to £65 billion of gilts to calm the market after Chancellor Kwasi Kwarteng’s mini-budget spooked investors and sparked a sell-off of British government debt.
Pension funds came under pressure to sell gilts to meet cash calls on leveraged bets amid the dramatic repricing, and could have become stuck in a reinforcing loop without the BoE’s action to backstop the market.
The central bank said Monday it has so far bought around only £5 billion of U.K. government bonds from the £40 billion offered to the market.
The BoE said it is “prepared to deploy this unused capacity” to support the market this week, including up to £10 billion on Monday, ahead of the end of the program on October 14.
The bank will also create a new liquidity support facility for banks on the other side of pension funds’ leveraged trades — called the Temporary Expanded Collateral Repo Facility (TECRF).
That will run until November 10 and accept a broader range of collateral, including investment-grade corporate bonds.
The BoE said it will also “stand ready” to support the funds through its regular Indexed Long Term Repo operations by providing additional liquidity to banks and through its new permanent Short Term Repo facility, launched last week.
The yield on a 30-year gilt has been steadily climbing over the last week and hit 4.5 percent this morning. The yield had reached nearly 5 percent before the bank’s initial intervention.
