The Bank of England announced on Monday that it would provide extra support to UK markets, stepping up efforts to ensure financial stability after the government̵[ads1]7;s plan to cut taxes while increasing borrowing sparked panic.
The central bank said it was ready to buy up to 10 billion pounds ($11 billion) of government bonds each day this week, double the daily limit it set when it announced its emergency intervention on September 28.
It confirmed the bond-buying program would end on Friday, but said it would provide extra support “beyond the end of this week” to banks still reeling from the fallout from a merger at some pension funds. The central bank said it would accept a wider range of assets as collateral in exchange for cash.
The move sends yet another signal to investors that the central bank is willing to do what it takes to restore more normal trading conditions to the bond market, which is needed to keep borrowing costs down for UK households and businesses.
Yields on long-dated government bonds, which move in the opposite direction, fell sharply after the Bank of England announced its first action in late September.
The central bank have said they were forced to act to prevent a “self-reinforcing spiral” after the market experienced a historic sell-off in the wake of the budget plans unveiled by Finance Minister Kwasi Kwarteng and Prime Minister Liz Truss.
But the interest rates on bonds with longer durations have pushed up again in recent days. Pension funds – which have been particularly vulnerable to the turmoil – have been forced to sell whatever assets they can to replenish depleted cash reserves.
Yields on those bonds rose again in early trading Monday and remain higher than they were before Kwarteng’s tax cut speech on Sept. 23
The Bank of England said stressed funds had made “significant progress” in the past week, but that it would continue to work with them to ensure “the industry operates on a more robust basis going forward.”
There is a particular focus on pension funds that employ liability-driven investment, or LDI, strategies, as this approach typically involves significant use of derivatives, which can make it more difficult to withstand a shock in the bond market.
To date, the Bank of England has raised just £5bn of debt when it could have bought £40bn, it said on Monday.