On September 28, the Bank’s Financial Stability Committee announced a two-week emergency purchase program for long-term UK government bonds.
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LONDON – IN Bank of England On Monday he announced further measures to ensure financial stability in the UK, based on its intervention in the long-term bond market.
The bank’s Financial Stability Committee announced on September 28 a two-week emergency purchase program of long-term UK government bonds – known as “gilts” – to restore order to the markets and Protecting Liability-Driven Investment (LDI) funds from imminent collapse.
The central bank announced on Monday that it will introduce further measures to ensure an “orderly termination” of the purchase plan on October 14, including increasing the volume of its daily auctions to allow for gold purchases before the Friday deadline.
“To date, the Bank has conducted 8 daily auctions, offering to buy up to £40 billion, and have purchased nearly £5 billion of bonds. The Bank is ready to deploy this unused capacity to increase the maximum volume of the remaining five auctions above the current level to reach 5 billion pounds at each auction,” the bank said in an announcement on Monday.
The auction limit will be confirmed every morning at 9am local time, with Monday set at £10 billion ($11 billion).
The bank will also launch an Extended Temporary Repurchase Facility (TECRF), which will allow banks to relieve liquidity pressures on client funds embroiled in recent market volatility. After an unprecedented rise in gold yields last month, LDIs – which hold large amounts of gold bonds and are mostly owned through terminal pension plans – were Receive margin calls from lenders.
A margin call is a request by brokers to increase the equity in an account when its value falls below the amount required by the broker.
TECRF will enable banks to operate what the bank called “liquidity lockout operations,” which will continue beyond Friday’s deadline and ease pressures on LDI client funds.
“Under these operations, the Bank will accept eligible collateral under the Sterling Monetary Framework (SMF), including index-linked securities, as well as a broader range of collateral that is not normally eligible under an SMF, such as a corporate bond security,” the bank said.
Third, the bank said it would be willing to use its indexed long-term repo every Tuesday – which allows market participants to borrow the Bank of England’s six-month cash reserves against less liquid assets – to further ease liquidity pressures on LDI funds.
“This permanent facility will provide additional liquidity to banks against eligible SMF collateral, including index-linked securities, and thus support their lending to LDI counterparties,” the bank said.
“Liquidity is also available through the bank’s new short-term permanent repo facility, which was launched last week, which provides an unlimited amount of reserves at the bank’s rate every Thursday.”
short term delay
The unprecedented rise in gold bond yields, which came on the back of the government’s controversial new fiscal policy announcements on September 23, had Bank of England staff working through the night before the bailout was launched on September 28.
The bank revealed last week that some LDI funds were hours away from collapsing the next morning, which would have sent shockwaves through the British economy.
Bob Parker, an advisor at CBP Quilvest, told CNBC Monday that the new measures are likely to calm market concerns in the short term, but there are still “a number of major problems” going into 2023.
“The first major problem is that obviously the BoE will have to raise the benchmark rate further – the consensus is that as we go into 2023, base rates above or below 4.5% is the central case,” Parker said.
“Obviously this has implications for gold yields, which then go back to structural problems with LDIs.”
Parker suggested that UK regulators “underestimated” the leverage in these LDI funds, leaving them exposed to collateral obligations and margin claims when returns suddenly rise.
Gold yields are expected to rise further, with 10 years Already over 100 basis points over the past month.
“The reality is that we still have negative real yields in excess of 5% with inflation trending for at least the next few months around 10%, and as a result … institutional and retail demand for gold bonds, I think, is going to go to,” Parker said.
United kingdom 30 years of doctrine Yields rose to their highest level since September 28 on Monday, up more than 8 basis points on the day.