Against the backdrop of an unprecedented repricing in UK assets, the Bank of England (BoE) announced a temporary and targeted intervention on Wednesday 28 September to restore market functioning in long-dated government bonds and reduce risks from contagion to credit conditions for UK households and businesses.
In line with the BoE’s financial stability objective and in order to avoid dysfunction in core funding markets, the purpose of these operations is to enable liability driven investment (LDI) funds to address risks to their resilience from volatility in the long-dated gilt market. LDI funds have made substantial progress in doing so over the past week.
The BoE plans to end these operations and cease all bond purchases on Friday 14 October. In the final week of operations, the Bank is announcing additional measures to support an orderly end of its purchase scheme.
- First, the Bank will stand ready to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases ahead of Friday 14 October. To date, the BoE has carried out 8 daily auctions, offering to buy up to £40 billion ($44.4bn), and has made around £5 billion of bond purchases. The BoE is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5 billion in each auction. The maximum auction size will be confirmed each morning at 9am and will be set at up to £10 billion on its first day (October 10). The Bank’s existing reserve pricing mechanism will remain in operation during this period.
- Second, the BoE will launch a Temporary Expanded Collateral Repo Facility (TECRF). This facility will enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations, which will run beyond the end of this week. Under these operations, the BoE will accept collateral eligible under the Sterling Monetary Framework (SMF), including index linked gilts, and also a wider range of collateral than normally eligible under the SMF, such as corporate bond collateral.
- Third, the BoE will also stand ready through its regular Indexed Long Term Repo operations each Tuesday to support further easing of liquidity pressures facing LDI funds. This permanent facility will provide additional liquidity to banks against SMF eligible collateral, including index linked gilts, and so support their lending to LDI counterparties. Liquidity is also available through the Bank’s new permanent Short Term Repo facility, launched last week, which offers an unlimited quantity of reserves at Bank Rate each Thursday.
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.