"What the Bank of England wants to avoid is a fresh round of collateral calls on pension funds’ liability driven investment strategies and the risk of wider contagion."
After an unprecedented repricing in UK assets following the government's mini-budget, the Bank announced a temporary intervention on Wednesday 28th September to "restore orderly market conditions", which included the purchase of long-dated UK government bonds.
The Bank plans to end these operations and cease all bond purchases on Friday 14th October.
In the final week of operations, the Bank has announced that it will stand ready to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases ahead of Friday 14th October.
The Bank is preparing to buy £10bn worth of bonds a day, double the previous limit of £5bn.
So far the Bank has only bought around £5bn of bonds out of the £65bn set aside for the programme.
The Bank will now deploy the unused capacity to increase the maximum size of the remaining five auctions above the current limit of £5bn in each auction. The maximum auction size will be confirmed each morning at 9am and will be set at up to £10bn in today’s operation.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, commented: "With the pound remaining weak and government borrowing costs inching up again towards worrying levels, the UK government and the Bank of England have launched a two pronged attempt to calm markets. Policymakers and politicians are clearly nervous about seeing a repeat of the mini-financial crisis unleashed following the presentation of the Truss administration’s slash and spend plans and fresh moves are being made to try and repair the damage.
"Chancellor Kwasi Kwarteng is now bringing forward his medium term fiscal plan and the publication of the independent analysis from the Office of Budget responsibility to the 31st of October. This is aimed at reassuring investors that the big tax cuts plans are costed and won’t see debt rise to unmanageable levels. Meanwhile the Bank of England’s showing its mettle by doubling down on its bond buying scheme, pledging to purchase up to £10 billion a day to prevent fresh problems for pension schemes in particular. So far though it’s not moved the dial much. The pound is still hovering around $1.10 and government borrowing costs have edged up again slightly, with 10 year gilt yields now at 4.3% and 30 year yields around 4.48%. What the Bank of England wants to avoid is a fresh round of collateral calls on pension funds’ liability driven investment strategies and the risk of wider contagion.
"It’s clear there is still much scepticism about the government’s plans just as Kwasi Kwarteng prepares to head to the International Monetary Fund’s annual conference where his policies are set for fresh scrutiny. All eyes will be on the independent assessment of his spending plans, and the risk is that if the numbers don’t add up, the markets could take fright again on Halloween."
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial, said: "It's frankly staggering that the financial services industry hasn't learnt its lesson from the 2008 Global Financial Crisis when it packaged up debt and used a combination of derivatives to sell risky assets as safe investments. This, in essence, is what the pension schemes have done. Using derivatives to leverage returns on government debt supercharges the risk involved beyond that of any regular asset class. The FCA and PRA look to have been asleep at the wheel once again."
Wes Wilkes, CEO at wealth managers IronMarket, commented: "Lance Corporal Jones' famous quote, "Don't Panic Mr Mainwaring", springs to mind. The Bank of England is essentially telling everyone to calm down whilst trying to mask its own panic. The messaging is needed, namely to shore up pension funds and convince them that Threadneedle Street has their back. But you have to ask why the Bank has been put in this position in the first place."
Adam Walkom, co-founder at London-based Permanent Wealth Partners, added: "The law of unintented consequences should be required reading at the Bank of England, but unfortunately they've neglected to do their homework. Who would have thought raising interest rates so much so quickly could have dire repercussions? The answer is virtually everyone it seems, except those on Threadneedle Street. This should give serious pause for thought for the Bank of England during their next Monetary Policy discussion."
