The Bank of England (BoE) continues to monitor developments in financial markets very closely in light of the significant asset repricing of recent weeks. It has also been working with the UK authorities to address risks to the resilience of Liability Driven Investment (LDI) funds arising from volatility in the long-dated government bond (gilt) market.
On 28 September, the Bank announced that, in line with its financial stability objective, it would make temporary and targeted purchases of gilts to help restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses. As previously announced, the BoE plans to end these operations and cease all gilt purchases on Friday 14 October.
Towards this, BoE announced additional measures to support market functioning and an orderly end to its gilt purchase scheme. These included the launch of a Temporary Expanded Collateral Repo Facility (TECRF) through which banks would be able to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations, and the expansion of the scale of its remaining gilt purchase auctions.
The purpose of these operations is to enable 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. However, the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.
Therefore BoE is announcing today that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022 alongside the BoE’s existing daily conventional gilt purchase auctions.
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. BoE has also consulted with the Debt Management Office.