The Bank of England on Tuesday expanded its efforts to stabilise the bond market to include inflation-linked bonds amid continuing concerns about the government’s budget. The bank said it will now purchase up to 10 billion pounds (USD 11 billion) of long-term bonds a day, including 5 billion pounds of conventional bonds and 5 billion pounds of index-linked bonds. The intervention will still end on Friday as originally planned.
The purchases were broadened to include index-linked bonds after yields on government bonds jumped again on Monday, returning to the levels reached immediately after the government on September 23 announced 45 billion pounds of unfunded tax cuts. Bond yields tend to rise as risk increases because they represent the annual return investors demand to loan money to the government.
Investors are concerned that the government’s plans will lead to high levels of debt and fuel further inflation, which is already running at 9.9 per cent. Pension funds have been particularly hard hit, with some being forced to sell bonds to cover other obligations.
While investment funds have made “substantial progress” in reducing their risks, there were further big moves in government bond prices at the beginning of this week, particularly related to index-linked bonds, the bank said.“Dysfunction in this market, and the prospect of self-reinforcing fire sale dynamics pose a material risk to UK financial stability,” the bank said in a statement.