Bank of England should expand bond buying, says Pensions Group

  • A UK pensions trade group called on the Bank of England on Tuesday to resume emergency bond-buying operations to manage debt market volatility.
  • The Pension and Life Savings Association urged the BoE to continue bond purchases until at least October 31.
  • The central bank launched its intervention in the bond market last month as fears of a UK financial crisis threatened to hurt investments held by pension funds.

A British pensions trade group called on the Bank of England on Tuesday to continue emergency bond-buying operations to manage debt market volatility that began last month on fears a financial crisis could hurt the funds’ investments.

However, the British pound fell on Tuesday afternoon after the head of the central bank reportedly said bond purchases would be completed as planned later this week.

The BoE is expected to continue buying long-term UK bonds until Friday as part of its £65bn intervention aimed at halting a massive sell-off of government debt. The BoE launched its action in late September after gold yields shot to 14-year highs and the pound sank, with turmoil spreading after the UK government announced unfunded tax cuts aimed at boosting economic growth .

“A key concern of pension funds since the Bank of England’s intervention has been that the shopping period should not end too soon,” the Pensions and Lifetime Savings Association said in a statement.

“[Many] believe that it should be extended to the next fiscal event on October 31 and possibly thereafter, or if the market is terminated, additional measures should be taken to manage market volatility,” the trade group said.

The BoE last week said $1 trillion of UK pension fund investments could have been lost if it did not intervene in its emergency bond purchases.

The pound on Tuesday fell below $1.10 against the dollar after Bank of England Governor Andrew Bailey said in a message to pension funds that the bank would soon end its emergency bond buying. “[You’ve] three days left now. You have to do that,” Bailey told the Institute for International Economics in Washington, according to the New York Times.

Before Bailey’s comment, the BoE said on Tuesday it would buy up to 5 billion pounds ($5.52 billion) of female arms each day until Friday. These bonds pay interest according to the rate of inflation. The BoE’s latest move “is a positive additional intervention,” PLSA said.

The BoE also warned on Tuesday that rising gold yields could pose a “fire sell” risk to UK financial stability.

Concerns about liability-driven investment strategies used by UK pension funds to meet their future obligations led to the central bank’s decision to intervene, Jon Cunliffe, the BoE’s deputy governor for financial stability, said in a recent letter to the Treasury Select Committee reviewed by Insider. .

“[Defined benefit] Pension fund investments in these pooled LDI funds will be worth zero,” Cunliffe said.

PLSA said that while the BoE’s early intervention was generally effective, recent days have shown that market confidence remains low.

The group said pension funds in the past two weeks have taken, among other actions, measures to strengthen their financial resilience.

“If there is a minority of cases where – in light of unprecedented fluctuations in market values ​​– leverage turned out to be too high or LDI providers lacked sufficient financial resilience, it is important that regulators and the industry address these risks,” he said.

Separately on Tuesday, the Institute for Fiscal Studies said the UK needs to cut spending or raise taxes by 62 billion pounds ($69 billion) to keep its debt under control under the government’s tax cut plan.

The country’s so-called mini-budget was unveiled by Kwasi Kwarteng, who became chancellor after Liz Truss took over as prime minister in September.

The UK 10-year gold yield on Tuesday fell 3 basis points to 4.43%. It was around 0.97% in early 2022.

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