As bond yields spike, Bank of England widens U.K. market intervention in second effort this week to calm volatile markets

The inclusion of those index-linked bonds will run from Oct. 11 to 14, alongside its existing daily conventional gilt purchase auctions, the BoE said.

But it remained to be seen if a second-day move by the central bank to calm markets will be effective.

Investors are anxiously looking ahead to Friday, when the central bank’s emergency bond-buying program announced last month are scheduled to end. The BoE announced additional measures on Monday to smooth that path, but the yield on the 30-year gilt 
TMBMKGB-30Y,
4.747%
jumped 29 basis points to 4.68% on Monday.

While that’s still below the 5.17% peak, it indicates concerns about the imminent end to the central bank’s program were causing fear in the market. The yield on the 10-year gilt 
TMBMKGB-10Y,
4.454%,
 which the central bank has not been buying, fell 6 basis points to 4.40%

On Monday, the BoE said it would boost the size of its daily gilt purchases and implement extra measures “to support an orderly end” to its emergency bond-buying plans.

It now will buy up to £10 billion ($11 billion) in bonds, up from a previous auction limit of £5 billion ($5.5 billion), though sticking with its pricing policy that has seen the central bank refuse many of the bonds put up for auction.

The BoE also said Monday that it plans to launch a temporary expanded collateral repo operation for liability-driven investment funds through liquidity insurance operations, which will run beyond the end of this week.

LDI funds are a popular product sold by asset managers like BlackRock
BLK,
-2.48%,
Legal & General
LGEN,
-3.89%
and Schroders
SDR,
-0.81%
to pension funds, using derivatives to help them match assets and liabilities so there is no risk of shortfall in money to pay pensioners.

But those measures failed to stop bond yields from surging, amid market fears that the pension fund market is not yet ready for that temporary debt purchase program to end.

A U.K. trade body for the country’s pensions industry on Tuesday welcomed the BoE’s fresh move, but said many pension funds want the emergency bond-buying program extended to at least Oct. 31 “and possibly beyond.”

The Pensions and Lifetime Savings Association said those funds fear market confidence is low and want the Bank of England to put even more measures in place to “manage market volatility.”

Also on Tuesday, an influential U.K. research group estimated that Chancellor of the Exchequer Kwasi Kwarteng will need to find fiscal tightening worth £62 billion ($68 billion) in 2026–27 to stabilize the country’s debt as a fraction of national income, said the Institute for Fiscal Studies (IFS).

It added that “even reversing all of the permanent tax cuts in Mr Kwarteng’s ‘mini-Budget’ would not be enough.” The U.K. sparked financial turmoil late last month when the government announced tax cuts that markets did not think it could afford, sending U.K. bond yields soaring.

Nomura strategist: British bond market turmoil is sign of sickness growing in markets

“A clear lesson from the Global Financial Crisis, the Covid-19 pandemic and the current cost of living crisis is that there are emergency periods where government needs to provide temporary support and that it is appropriate for debt to rise during those times,” said the IFS, which added that trying to keep debt at such times of crisis would likely be “futile.”

“But it is certainly unsustainable for policies to leave debt on a path where it relentlessly grows as a share of national income. And wanting the ability to raise debt when the next sizeable adverse shock hits provides a reason to aim to have debt falling outside of crises,” it said.