BOE Offers to Buy More Gilts, Launches New Repo Facility for LDI Funds

By Paul Hannon

The Bank of England is offering to buy long-dated U.K. government bonds in larger amounts as a program designed to ease strains in the cornerstone financial market draws to a close, and Monday also said it will take steps to provide continuing support to U.K. pension funds.

On Sep. 28 the U.K.'s central bank launched a series of auctions in which it offered to buy GBP5 billion of long-dated gilts, as U.K. government bonds are known. The program was aimed to stanch the damage from a furious selloff in U.K. government debt over previous days in the aftermath of a surprise package of tax cuts unveiled by the government.

Those auctions are scheduled to end Friday, and the BOE said it will increase the daily amount on offer, starting with GBP10 billion Monday. The central bank said it had purchased GBP5 billion of gilts to date, out of an available GBP40 billion.

"The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to GBP5bn in each auction," it said in a statement.

The central bank also said it will launch a Temporary Expanded Collateral Repo Facility to provide cash in exchange for gilts to banks on behalf of their Liability Driven Investment funds.

LDIs were at the forefront of the central bank's concerns about the impact of rising gilt yields on the stability of the U.K.'s financial system in the days following the announcement of tax cuts.

They are used primarily by pension funds to match long-term liabilities they have to retirees with less capital than they would by owning regular long-dated government bonds. But they expose the funds to losses if rates shoot up quickly. LDI funds became increasingly popular during the long stretch of ultralow interest rates of the past decade. Regulatory changes also encouraged their use.

"This facility will enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations, which will run beyond the end of this week," the BOE said.

The central bank said it will also make one of its existing, permanent repo windows available to banks acting to help LDI fund clients.

"Beyond the end of this week's operations, the Bank will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future," the BOE said.

Write to Paul Hannon at [e-mail]

(END) Dow Jones Newswires

10-10-22 0249ET