Yahoo Finance Pound rallies as Bank of England doubles bond-buying programme to £10bn a day
The pound (GBPUSD=X) made marginal gains on Monday morning after a surprise announcement by the Bank of England (BoE) said it would step up measures to protect pension funds from market turmoil.
Sterling jumped in the wake of the announcement and was trading around $1.11. continuing its bearish stance after it plunged following the mini-budget by chancellor Kwasi Kwarteng.
The BoE’s three “additional measures” are aimed at broadening the central bank’s support for the pension industry, as it prepares to end its emergency backstop on Friday.
The Bank says that it will now buy up to £10bn of government bonds a day — double the previous limit of £5bn.
So far the Bank has bought only around £5bn of bonds under the £65bn programme that will run until 14 October.
"To date, the bank has carried out eight daily auctions, offering to buy up to £40bn, and has made around £5bn of bond purchases," it said on Monday.
"As set out previously, all purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided."
That could help maintain financial stability this week, preventing bond prices tumbling and forcing liability driven investment (LDI) pension funds into a dangerous spiral again.
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The pound hit a record low after the government's mini-budget sparked turmoil in financial markets. and investors had demanded a much higher return for investing in government bonds, causing some to halve in value.
Some funds linked to pension schemes, which invest in bonds, were forced to start selling, sparking fears of a fresh market downturn.
Threadneedle Street also said it would also launch a "Temporary Expanded Collateral Repo Facility", aimed at providing liquidity to banks whose clients are struggling with sudden cash calls. That will continue beyond Friday.
It will let the Bank accept a range of assets as collateral — including UK gilts and corporate bonds — to help pension funds facing a liquidity squeeze.
Finally, the Bank said it also “stands ready” to help the LDI pension industry through its regular “Indexed Long Term Repo operations”. This will also allow funds to borrow cash from the BoE in exchange for handing over assets as collateral.
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“Beyond the end of this week’s operations, the Bank will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future,” the BoE said in a statement.
Former pensions minister Steve Webb said the move should reduce the risk of a “cliff edge” on Friday.
Good to see the Bank of England doubling the limit on its daily limit for gilt purchases (when required). Should help to reduce any risk of a 'cliff edge' at the end of the week when the current special measures are switched off.
— Steve Webb (@stevewebb1) October 10, 2022
Torsten Bell, head of the Resolution Foundation’s, said the Bank is telling the markets not to test its pledge to restore stability in the long-dated government bond market.
Bank of England sets out its plan to reduce the chance of pension fund driven instability after gilt sales finish on Friday - summary is supporting banks to provide liquidity as @bankofengland itself tries to step back from providing it https://t.co/ooypoxcx40
— Torsten Bell (@TorstenBell) October 10, 2022
Antoine Bouvet, senior rates strategist at ING, wondered if the BoE is afraid of a bond sell off.
Interesting that they felt the need to raise the size given how little offers they received in previous operations and how little they have bought
Reserve pricing process remains in place. Either they're aware of more selling intententions, or they're wary of the bond sell off— Antoine Bouvet (@AntoineBouvet2) October 10, 2022
Pension schemes use liability driven investment (LDI) to shield themselves against adverse moves in inflation and help match their liabilities with their assets.
