The Bank of England has signalled privately to lenders that it was prepared to extend its emergency bond-buying programme beyond this Friday’s deadline if market conditions demanded it, the Financial Times reported on Wednesday, citing three sources.
The report comes after the British central bank’s governor Andrew Bailey said on Tuesday that he had no intention of extending purchases of bonds beyond Friday when they are due to stop. Sterling bounced 0.4% to $1.1008 after the report.
By buying bonds, the BoE is seeking to reverse what it sees as “dysfunction” in the bond market.
Specifically, the central bank was seeking to address problems facing pension funds.
These funds were forced to stump up vast amounts of emergency collateral in liability-driven investments (LDI), which use derivatives to hedge against shortfalls in pension pots, after British government bonds dropped sharply in value.
Fire-fighting Bank of England forced to buy inflation-linked bonds
“They (representatives from the central bank) told us that they were watching the LDI managers closely to see whether they had managed to generate enough liquidity for their clients to cope with margin calls and would decide whether to extend the facility on Thursday or Friday,” the FT quoted one banker as saying.
The BoE on Tuesday expanded its programme of daily bond purchases to include inflation-linked debt, citing a “material risk” to British financial stability and “the prospect of self-reinforcing ‘fire sale’ dynamics”.
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