The Bank of England is expanding its Bond-Market Rescue Bank to restore financial stability in the UK

LONDON—The Bank of England has extended support aimed at pension funds for the second day in a row. A bond-market sale This has threatened the financial stability of the UK.

The central bank said on Tuesday it would add inflation-linked government bonds to its long-term bond purchase program, after an attempt on Monday. Help with pension fund Couldn’t calm the markets.

“Disruption in this market, and the prospect of a self-reinforcing ‘fire sale’ dynamic, poses a material risk to UK financial stability,” the BOE said.

The yield on the 30-year UK inflation-linked bond rose more than 1.5% this week, from 0.851% on October 7.

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A few weeks ago, the yield on the gilt, as UK government bonds are known, was negative. As yields rise as prices fall, the effect is punishing losses for bond investors.

Yields on inflation-linked gilts were largely steady on Tuesday, but at new, higher levels after the BOE expanded purchases. The central bank said it bought about 2 billion pounds, equivalent to about $2.21 billion, in inflation-linked gilts, out of a daily capacity of £5 billion.

However, the bank’s bond purchases will end on Friday. The Pensions and Life Savings Association, a trade body representing the pension industry, on Tuesday urged the central bank to extend its purchases until the end of the month.

Almost daily expansion Bank of England’s rescue plan It highlighted the challenges faced by central banks in overcoming the induced problems A once-in-a-generation inflationary spike and interest rates. It also raised the question of whether the BOE is providing the right remedy to address the problem.

BOE Governor Andrew Bailey said the bond-buying program will end on Friday as planned.

“You have three more days,” he told pension funds on Tuesday. “You have to do this.”

Speaking at an event on the sidelines of the International Monetary Fund’s annual meetings, he said there was a “window of opportunity” to sell assets to cover “very large margin calls”.

Mr. Bailey’s comments sent ripples through markets on both sides of the Atlantic. The British pound fell 0.9% to $1.09, while the S&P 500 index, which spent most of the day in positive territory, finished down 0.65%.

A day earlier, turmoil in UK bond markets led to fresh calls for pension funds to come up with cash to boost LDIs, or Responsible InvestmentsDerivative-based strategies are meant to help retirees match their payments over the long term.

The turmoil in the UK bond market created a feedback loop that left investors such as pension funds short of cash and spilled over into other markets. The WSJ’s Chelsea Dulaney explains the type of investment at the heart of the crisis. Description: Ryan Trefs

LDIs were at the source of the induced bond sell-off BOE’s original intervention. Pension schemes saw a wave of margin calls at the end of September after Prime Minister Liz Truss’s government announced the big one. Debt-Finance Tax Cut This triggered an unprecedented bond market sell-off.

BOE was launched Its original bond-buying program on September 28, but calm was restored for only two days before sales resumed. The plan’s expansion pulled back on Monday, and yields rose again.

Monday’s selloff was “very reminiscent of two weeks ago,” said Simeon Willis, chief investment officer at XPS, a firm that advises retirement plans.

LDI strategies use leveraged financial derivatives tied to interest rates to multiply returns. Last month led to a lot of moves in UK bond markets Large collateral calls on pensions To back up foreign investments. Pension funds have sold other assets, including government and corporate bonds, to meet those calls, increasing pressure on yields and creating a spiraling effect in markets.

Pensions are typically large holders of inflation-linked government bonds that help protect plans from both inflation and interest-rate changes. But these did not qualify for the BOE’s bond-buying program until Tuesday.

In the 1980s the UK helped pioneer bonds with inflation-linked payments, sometimes referred to as pegs. The connectors were originally sold exclusively to pensions, but the UK has opened them up to other investors over the years.

Pensions are a dominant force in the market because bonds provide long-term protection against both inflation and interest-rate changes. Their high volume has left the stock market vulnerable to swings in pension-fund demand seen in recent weeks.

Adam Skerry, a financial manager

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Focusing on inflation-linked government bonds, he said his firm has struggled to trade those assets in recent days.

“We tried to sell some bonds this morning and it was almost impossible to do,” he said. “The LDI issue facing the market, moving to the extent that the market did, especially yesterday, suggests that there is still a downside. [of selling] There.”

Pensions are reluctant to sell their bonds to the BOE, reflecting a mismatch between what the Fed is offering and what the market needs.

“The way the bank has structured this intervention is that they can only buy assets if people make offers, but no one is making offers,” said Craig Inch, head of rates and money at Royal London Asset Management. He said pension funds sell risky assets, including corporate bonds or properties.

XPS’s Mr. Willis said many pensions prefer to hold their government bonds because it helps protect pensions against changes in interest rates, which affect the way their liabilities are valued.

“If they sell the gilts now, they’ll have to buy it back at some point in the future and they’ll be more expensive, which won’t help,” he said.

Also affects planning: Pension funds are traditionally slow-moving institutions that make decisions with multi-decade horizons. Market volatility has hurt them in the warp-speed-style moves usually reserved for traders at swashbuckling hedge funds.

Industry players describe a game of telephone between trustees, investment advisers, fund managers and banks to decide whether to sell assets. Pension funds spread their assets among multiple managers, which are run by separate custodian banks. Calling everyone for the necessary symptoms makes for a long and involved process.

To give themselves more time, pension funds are pushing the BOE to extend its bond-buying program at least until the end of the month. That’s when UK Chancellor of the Exchequer Kwasi Kwarteng is expected to set out the government’s borrowing plans for the coming year.

The Institute for Financial Studies, a non-partisan budget-focused think tank, has warned that borrowing will reach £200bn in the financial year ending in March, the third highest in a financial year since World War II and £100bn more. than planned in March this year. Increased debt increases the supply of bonds and generally increases bond yields.

Mr. Kwarteng said on Tuesday that BOE Governor Mr. declared his faith in Bailey.

“I speak to the governor often and he is completely independent and is managing the global situation very effectively,” he said.

Write to Chelsey Dulaney at [email protected], Anna Hirtenstein at [email protected], and Paul Hannon at [email protected]

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