Thanks to Cat Rutter-Pooley for this.
The Bank of England’s intervention in the gilt market almost two weeks ago averted a fire sale and a “self-reinforcing spiral” that risked “financial instability”, in the words of the Bank’s deputy governor Jon Cunliffe. But there have been worries about what happens when the Bank’s time-limited action comes to an end this Friday.
This morning the BoE set out the extra actions it would take ahead of that cliff-edge. No change to the plans to end operations in the long-dated gilt market on Friday: the Bank said liability driven investment funds, the pension strategy at the centre of the crisis, had made “substantial progress” to address risks to their resilience from volatility over the past week.
But the BoE said it stood ready to expand its gilt purchases this week above a daily £5bn limit. Having underspent that cap over the eight daily auctions so far to the tune of £35bn in total, the BoE said it could deploy that extra firepower this week if needed. Today’s auction now has a £10bn cap.
The central bank also said it would launch a “Temporary Expanded Collateral Repo Facility” that will run beyond the end of this week under which it would accept a wider range of collateral than usual from banks to help ease liquidity pressures facing their client LDI funds, and would support “further easing of liquidity pressures” through its regular indexed long term repo operations.
The Bank said it would
“continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future”.
After not using its little stick last week , the BOE is now waiving around a bigger stick. The markets aren’t co-operating with the 20 year gilt at one point up to 4.75 % (up more than 3.5% on the day). The interactions after October 14th look to be to do with the money markets and BAU for the BOE.
The Chancellor’s announcement this morning initially took some of the pressure off Government borrowing.
Chancellor @KwasiKwarteng has announced that the Medium-Term Fiscal Plan will be published on 31 October & an @OBR_UK forecast has been commissioned for that date. pic.twitter.com/RoiNyhLmQA
— HM Treasury (@hmtreasury) October 10, 2022
Though the yields have now risen again to over 4.9% (a rise of nearly 8% on the day)
Further reporting from the FT can be found on this link (free to the first clicks)