The Bank of England has warned of “a material risk to UK financial stability” and “dysfunction” in part of the pension market despite its unprecedented intervention late last month.
It comes after the cost of government borrowing continued to rise yesterday.
Gilt yields, the interest rate payable on government bonds, rose on Monday, near the 5% highs of 27 September, the day before the Bank made its intervention.
The rise came despite the Bank’s Monday announcement of a potential doubling of spending in its emergency bond buying and extended support for a part of the pensions market.
Tuesday morning’s announcement extended its intervention again. Now the Bank will begin to purchase index-linked gilts, government bonds with interest payments in line with inflation.
The move has been made as a result of “further significant repricing of UK government debt” particularly in index-linked gilts.
It was “dysfunction” in this section of the market and the “prospect of self-reinforcing ‘fire sale’ dynamics” that posed a “material risk to UK financial stability”, the Bank said.
The Bank had announced its 28 September temporary and emergency buying programme of long-dated gilts, that are to be repaid in 20 to 30 years time, in the wake of chancellor Kwasi Kwarteng’s mini-budget announcement.
Market turmoil that stemmed from the mini-budget had led to an unprecedented intervention from the regulator to prevent part of the pension market collapsing as the cost of interest on gilts surged.
The so-called yield fell back at the time of the Bank’s intervention but has risen steadily since.
The temporary, 13 day bond buying is still due to end on Friday 14 October.
The decision to again expand purchasing, this time to index-linked gilts, it is hoped will “act as a further backstop to restore orderly market conditions”, the Bank said.