Bailey: No extension to emergency bond-buying programme

ANDREW Bailey has dramatically ruled out an extension to its emergency bond-buying programme – telling pension funds “you’ve got three days left” to beef up their liquidity positions.

The emergency intervention is due to end Friday, but trade bodies had been calling for the Bank to avoid a cliff edge.

Last night the Governor told an audience in Washington that the Bank would be “out” of the market in bonds – a move that is likely to see yields on UK bonds spike yet again.

It came after the Bank announced yesterday morning it would expand its bond-buying programme over its final days, including buying index-linked UK gilts, the second ramp-up of support in as many days.

Pension funds were hit with what Bailey called “big margin calls” after “unprecedented volatility” at the longer end of the gilt market after the Chancellor Kwasi Kwarteng’s mini-budget almost a fortnight ago.
That volatility led to UK pension funds, some of which were invested in complex “LDI” funds linked to long-term gilt yields, being hit with cash calls.

The fear in the corridors of the Bank was that those calls would force further sales of gilts – creating a vicious circle of higher yields.

The Bank stepped in a package of bond-buying which was intended, Bailey said, to give funds a “window of opportunity” to rebalance their portfolios.

Those funds have been scrambling to boost their cash levels ahead of the deadline in case of further margin calls if yields continue to spike.

Yesterday, the Pensions and Lifetime Savings Association, the trade body, said the Bank had said the Bank should extend its temporary bond purchases “possibly beyond” the deadline and beyond the so-called ‘fiscal plan’ due to be presented by the Chancellor on Halloween, designed to assuage market fears.
Industry experts repeated those worries.

Pensions partner at Eversheds Sutherland Simon Daniel told Morning Wire prior to Bailey’s late night announcement that bond market upheaval is “expected to return” if the Bank’s scheme ends later this week.

Funds are “rebuilding liquidity” ahead of the cut off, he added.

Pension funds have been selling off bonds and equities at discount rates to boost their cash positions in preparation for Friday’s deadline.

Bailey said he and deputy governor Sir Jon Cunliffe had been “up all night in recent days working out how to solve the problem.” The governor welcomed the inclusion of a forecast from the Treasury watchdog in Kwarteng’s upcoming plan.