LONDON — The Bank of England has offered to buy larger amounts of long-dated U.K. government bonds and said it will provide continued support to pension funds at the heart of the U.K. bond market crisis.
On September 28, the UK central bank launched a series of auctions in which it offered to buy 5 billion pounds of long-term gilts, as UK government bonds are known, equivalent to $5.5 billion. The program was aimed at smoothing the damage from a frenzied sell-off of British government debt in recent days, following a surprise package of tax cuts announced by the government.
Those auctions are scheduled to end on Friday and the BOE said it would increase the daily amount on offer, starting at £10bn on Monday. The central bank said it had bought 5 billion pounds to date, out of the 40 billion pounds available.
“The Bank stands ready to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of £5 billion in each auction,” it said in a statement.
The central bank also said it would launch a Temporary Extended Collateral Repurchase Facility to provide cash in exchange for leveraged funds to banks on behalf of clients managing liability-based investment funds.
LDIs were at the forefront of central bank concerns about the impact of rising gold yields on the stability of the UK financial system in the days after the tax cuts were announced.
They are mainly used by pension funds to match their long-term obligations to retirees with less capital than they would by holding regular long-dated government bonds. But they expose funds to losses if interest rates rise quickly. LDI funds became increasingly popular during the long stretch of ultra-low interest rates of the past decade. Regulatory changes have also encouraged their use.
“This facility will allow banks to help reduce liquidity pressures facing their customers’ LDI funds through liquidity insurance operations, which will last beyond the end of this week,” the BOE said.
The central bank said it would also make available one of its existing, permanent repo windows to banks acting to help LDI clients finance.
“Beyond the close of business this week, the Bank will continue to work with UK authorities and regulators to ensure that the LDI industry operates on a more resilient footing going forward,” the BOE said.
Write to Paul Hannon at [email protected]
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