The cost of government borrowing has continued to soar after the Bank of England said it would end its emergency bond-buying programme on Friday as planned, countering claims it was considering an extension.
The price of 20-year UK bonds hit new lows on Wednesday afternoon, sending their interest rates – or yields – to levels last seen in 2002, after Threadneedle Street said it would put a hard stop to its £65bn package of support for the bond market.
The Bank was forced to intervene on 28 September, promising to spend up to £5bn a day buying government debt, after unfunded tax cuts announced as part of the mini-budget sent the pound and UK bond prices plunging, stoking a liquidity crisis among pension funds.
The Bank’s emergency package was meant to avoid a potential collapse of pension funds involved in complex investment schemes and restore stability.
But on Wednesday, the Bank doubled down on governor Andrew Bailey’s insistence that the bond-buying programme will end on Friday 14 October, despite concerns that market turmoil would continue beyond its deadline and that the BoE has created a cliff edge.
“As the bank has made clear from the outset, its temporary and targeted purchase of gilts will end on 14 October. The governor confirmed this position [on Tuesday], and it has been made absolutely clear in contact with the banks at senior levels,” the Bank said in a statement on Wednesday morning, released as the Bank was updated on last month’s financial policy committee (FPC) meeting.
Overnight, the Financial Times reported that the central bank was in contact with commercial lenders to signal it was ready to extend the scheme as necessary. The Bank’s latest statement appears to contradict those reports.
The decision to close the scheme is meant to pressure pension funds to raise tens of billions of pounds to build up cash buffers, and ensure they are protected against future shocks in the value of government bonds after the Bank withdraws its support.
It is understood the Bank expects demand to increase towards the end of the week as pension funds caught out by recent market turmoil rebalance their portfolios.
Releasing the minutes of its regular FPC meeting, the Bank said investors needed to “put their funds on a sustainable footing, for whatever level of asset crisis prevail when the Bank ceased purchasing gilts”.
The Financial Conduct Authority, which regulates the asset managers running the complex investment strategies on behalf of defined benefit pensions schemes, said City firms needed to focus on boosting their cash buffers before the purchasing scheme ends.
“What’s really important right now is that everybody involved in this situation – the pension funds, the managers, the bank counter-parties – really focus on the work they need to do in coming days to ensure there is resilience in the system,” the FCA’s chief executive, Nikhil Rathi, said after the watchdog’s annual public meeting on Wednesday.
“And obviously we’ll be looking at what’s happened in the last few days, and thinking about what other further strengthening in standards … can be put in place for the future,” Rathi added.
But there are concerns that market turmoil could continue beyond the Bank’s Friday deadline, resulting in a further spike in government bonds yields, and forcing another fire sale of assets by pension funds involved in so-called liability-driven investment (LDI) schemes.
The Bank has already expanded its bond-buying programme twice in as many days this week.
On Monday, the Bank said it was doubling the value of bond purchases it was prepared to make each day from £5bn to £10bn, and on Tuesday it extended the scheme to buying a wider range of bonds, including index-linked gilts.
As markets closed on Tuesday, Threadneedle Street said it had spent £3.3bn buying up bonds, marking an increase in the Bank’s spending, which had totalled £5bn over the first eight days of the scheme. However, that is still far short of the potential £5bn a day the Bank had said it could spend.
Although pension industry leaders have called for the purchases to continue beyond this Friday, Bailey said on Tuesday evening that the programme would end, suggesting that fund managers needed to rebalance their investments to avoid another potential fire sale of pension assets.
“My message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done,” he said.
The pound fell more than one cent against the US dollar after his statement, pushing it below $1.10.
The FPC also warned on Wednesday that other parts of the financial system could come under threat if there was another round of sharp moves in global asset prices.
That could strain, for example, open-ended investment funds, which allow investors to pull their money at short notice but tend to be invested in property and other assets harder to sell at short notice.
Overall, the Bank said foreign regulators needed to work together to address the financial risks outside the banking sector, often referred to as shadow banking.
“Absent such an increase in resilience, the financial stability risks associated with core market dysfunction could return or resurface in other parts of the financial system,” the meeting minutes said.
Meanwhile, the Bank said the proportion of households struggling to pay their mortgages could surge to levels not seen since the 2007-08 financial crisis, if interest rates and living costs continue to surge.
However, policymakers said this was unlikely to result in a banking crisis, given that borrowers were in a “stronger position” than they were before 2007.
The Bank said this was partly due to caps on the amount that people could borrow for mortgages, compared with their incomes.
