The Bank of England intervenes again in the bond markets, warning of “significant risks” to financial stability in the UK

The Bank of England raised interest rates by 0.5 percentage points on Thursday.

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LONDON – The Bank of England announced on Tuesday an expansion of its emergency bond-buying operation as it looks to restore order to the country̵[ads1]7;s chaotic bond market.

The central bank said it will “broaden the scope” of its purchases of UK government bonds – known as gilts – to include index-linked gilts from 11 October to 14 October.

Index-linked gilts are bonds where payments to the bondholders are benchmarked in line with the UK retail price index.

The move marks the second expansion of the bank’s extraordinary bailout in as many days, after it increased the limit on its daily gold purchases on Monday ahead of the planned end of the buying arrangement on Friday.

The bank launched its emergency intervention on September 28 after an unprecedented sell-off in long-dated UK government bonds threatened to collapse LDI funds (multiple liability-driven investment funds), which are prevalent in UK pension schemes.

“The start of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire-sale’ dynamics, pose a significant risk to UK financial stability.” warned the bank.

UK 10-year index-linked gilt yields rose 64 basis points on Monday, representing a massive 5.5% drop in price. The yield moves inversely to the prices.

Meanwhile, 30-year indexed gilt prices fell 16% on the day, with yields now around 1.5%, having been at -1.5% just six months ago.

Movements of this magnitude would not normally be expected in developed government bond markets.

This is a developing story and will be updated soon.

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