The Bank of England (BoE) has increased the daily buying limit of its bond intervention from £5bn to £10bn, in an attempt to calm fears of a pension fund sell-off.

In a statement today, the Bank confirmed it is to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases ahead of Friday 14 October

The move to purchase up to £65bn of gilts was first announced on 28 September amid concerns liability driven investment (LDI) strategies operated by defined benefit (DB) pension funds could be forced to sell gilts to meet hedge fund collateral calls.

To date, the BoE has carried out eight daily auctions, offering to buy up to £40bn, and has made around £5bn of bond purchases. The Bank confirmed that it is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5bn in each auction. The maximum auction size will be confirmed each morning at 9am on Friday and will be set at up to £10bn in today’s operation.

The Bank’s existing reserve pricing mechanism will remain in operation during this period.

Commenting on the move, head of retirement policy at AJ Bell, Tom Selby, said: “The BoE has further loosened its daily gilt buying purse strings as it prepares to wind up the dramatic intervention it first announced on 28 September.
 
“In addition, it has set out its plan beyond this Friday, when it will stop buying gilts, with a clear-eyed focus on maintaining order in the market and preventing a ‘death spiral’ of forced gilt sales from UK pension funds.
 
“However, there remains huge uncertainty over the adjustment period once the Bank steps back from its emergency intervention. It will no doubt be crossing its fingers that the certainty it has attempted to provide today will ensure calm is restored to the market.”

The BoE was forced to intervene in the wake of Chancellor Kwasi Kwarteng’s mini-Budget because of the problem it created in the gilt market. Investors concerned by the government’s spending plans “sold off bonds in their droves”, Selby added, driving down the price and in turn pushing up gilt yields.
 
“Normally higher gilt yields are good news for DB pensions because they push down the value of liabilities, which, all else being equal, should improve their funding position,” Selby continued.
 
“However, lots of pension funds use LDI strategies to hedge against interest rate risk. This essentially means that when gilt yields rise and the funding position of the scheme improves, the scheme will need to pay money to the investment bank running the LDI fund.
 
“The problem is that schemes are huge investors in gilts, meaning they would have been forced to sell these investments in order to pay what they owe to the hedging strategy.
 
“As a result, without the Bank’s dramatic intervention, these strategies could have added more fuel to what was already a potentially explosive economic situation.”

Senior investment and markets analyst at Hargreaves Lansdown, Susannah Streeter, added:
“Kwarteng is now bringing forward his medium term fiscal plan and the publication of the independent analysis from the Office of Budget responsibility to 31 October. This is aimed at reassuring investors that the big tax cuts plans are costed and won’t see debt rise to unmanageable levels.

“It’s clear there is still much scepticism about the government’s plans just as Kwarteng prepares to head to the International Monetary Fund’s annual conference where his policies are set for fresh scrutiny. All eyes will be on the independent assessment of his spending plans, and the risk is that if the numbers don’t add up, the markets could take fright again on Halloween.”

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