‘Material risk’ to UK financial stability with part of pension-linked market ‘dysfunctional’, Bank of England warns

The Bank of England has warned of “a material risk to UK financial stability” as it widened its programme to buy up government bonds.

The move has been made as a result of “further significant repricing of UK government debt” in one pension-linked market, the Bank said.

It added that it was “dysfunction” and the “prospect of self-reinforcing ‘fire sale’ dynamics” that posed a “material risk to UK financial stability”.

The market worrying the Bank is the trade in index-linked gilts, government bonds with interest payments in line with inflation.

In the wake of the chancellor’s mini-budget the Bank had been buying up long-dated gilts – a type of government bond that make up a large proportion of pension pots – to steady market jitters about the government’s financial management.

On Monday the Bank announced a potential doubling of the amount it was willing to spend every day.

Tuesday morning’s announcement extended its intervention again.

It comes after the cost of government borrowing continued to rise yesterday.

Gilt yields, the interest rate payable on government bonds, rose on Monday, near the 5% highs of 27 September, the day before the Bank made its first intervention.

The Bank announced on 28 September a temporary and emergency buying programme of long-dated gilts that are to be repaid in 20 to 30 years time, in the wake of chancellor Kwasi Kwarteng’s mini-budget announcement.

Read more: What are bonds, how are they different to gilts and where do they fit in the mini-budget crisis?

Market turmoil that stemmed from the mini-budget led to the unprecedented intervention from the regulator to prevent part of the pension market collapsing as the cost of interest on gilts surged.

The so-called yield fell back at the time of the Bank’s intervention but has risen steadily since.

The temporary, 13-day bond buying period is still due to end on Friday 14 October.

The decision to again expand purchasing, this time to index-linked gilts, it is hoped will “act as a further backstop to restore orderly market conditions”, the Bank said.