Bank of England forced to step in AGAIN & buy Govt bonds to steady markets – what it means for your money

THE Bank of England has stepped in once again to steady markets by buying inflation-linked UK government bonds.

The BoE said the ongoing instability in the bonds market poses a "material risk to UK financial instability".

As part of an emergency move to calm markets, the BoE will widen the scope of its government bond purchase programme to include index-linked bonds.

It will buy up to £5billion of index-linked bonds and £5billion of conventional bonds per day, starting today, Tuesday, October 11, until October 14.

In total, that means it will purchase up to £10billion of bonds every day until Friday.

The BoE has made this move because pension funds are facing having to sell off inflation-linked bonds - which would cause the market to tumble.

The value of the pound has also tumbled by 0.2% against the dollar.

The government bond market is worth £2.1trillion, and underpins the UK financial market.

In September, the BoE dramatically stepped in to avoid pension funds collapsing by buying government bonds in the aftermath of the mini-Budget.

Markets were spooked about the rising amount of government debt, triggering the sale of bonds.

It put several large pension funds at risk of collapse, which would have had a catastrophic effect on Brits' private pension pots and likely would have resulted in a downward spiral of the market.

The Bank of England yesterday said it would double its bond buying limit to £10billion.

But the central bank has been forced to act again as the limit increase failed to stop investors resuming the sell-off in government bonds.

Long-dated gilt prices tumbled, which sent yields on 30-year bonds soaring to 4.7% on Monday – their highest level since the Bank of England was forced to step in last month to avoid a mini financial market crisis.

Index-linked government bonds are meant to be very stable - but one bond that was issued last September has fallen by 80% in a year in value.

The Chancellor also said he will bring forward releasing details of his fiscal plan to October 31.

The plan will explain how government spending - including tax cuts - revealed in the Budget will be paid for.

Despite the turmoil, the Prime Minister Liz Truss is still committed to the measures announced in the mini Budget, Downing Street said today.

A spokesperson said: “The Prime Minister is committed to the growth measures set out by the Chancellor.”

“The Prime Minister remains confident that the measures set out will deliver growth in the economy.”

“The additional measures announced today will support an orderly end to the Bank of England’s intervention scheme.

“It’s in line with its financial stability objective and we are in regular contact with the Bank, which will closely monitor markets in the coming days.”

Deputy Prime Minister Therese Coffey insisted pensions are safe despite the Bank of England’s warning of a “material risk to UK financial stability”.

She told BBC Breakfast: “I’m absolutely confident pensions are safe, the Bank of England is independent and undertaking its role in trying to bring some stability, which it had done.

“I’m not aware of the details of exactly what’s happened this morning. The short briefing message I’ve had from Treasury is that it’s a technical financial stability.”

While shadow chief secretary to the Treasury Pat McFadden said the latest BoE intervention "creates renewed pressure for the Chancellor to reverse his Budget".

He said: "This is a Tory crisis made in Downing Street, being paid for by working people.

“They have lost all credibility and control and they must respect our nation’s independent institutions, go back to the drawing board and reverse this damaging Budget.”

What are bonds?

Bonds are IOU notes that the government uses to borrow money and pay a fixed amount in interest. 

Government bonds are called GILTS and are bought and sold by investors, including pension funds, who like them because they are usually fairly stable, long term investments and help cushion them from interest rate volatility.

Gilts tend to go down in price when interest rates are rising, and increase when rates are falling.

People pay attention to the YIELDS - the amount of interest on the bonds which is described in % terms - because this shows investors’ confidence in them.

The higher the yield, the cheaper the price, and the riskier investors think they are.

Bonds are in the spotlight at the moment because yields on gilts are trading at the same highs as in the scary days of the last financial crisis in 2008, suggesting investors are nervous about the UK economy. 

The yield on a 30 year gilt is 4.5% - the highest level in 14 years. 

The Bank of England is stepping in to buy more of them in order to prevent the collapse of the government bond market.

The BoE said: "These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity.";

What it means for your money

Anyone with a private pension is not directly affected by the Bank of England’s bond buying.

But it has stepped in to ensure that the way pension cash is collectively invested remains stable - and isn’t affected by dramatic movements in the markets after the pound plunged.

Workers who save into a private pension should continue to save into them as normal. 

As pension savings are a long term investment there is time to ride out any market falls, as they bounce back in time - for example, from the global financial crisis and the Covid pandemic.

Funds invested in the UK stock market will have fallen in value. But when sterling is weak, the value of overseas investments when converted back into sterling will receive a boost.

So it depends how your pension is invested, and is why it pays to diversify your investments.

Some types of pension - known as defined benefit (DB) or final salary - are more invested in gilts (government bonds), and so are more exposed to falling gilt prices.

The Bank of England’s (BoE) bond buying is aimed at stopping them falling too far.

Helen Morrissey, pensions expert at Hargreaves Lansdown previously told The Sun: “The BoE’s announcement should calm the markets after a tumultuous few days that have caused chaos with news of some final salary schemes having to sell assets at short notice.

“This should settle down but final salary scheme trustees have been urged to keep the resilience of their investment strategies under close review.” 

The fallout of the mini-Budget caused a mortgage meltdown, with homeowners facing paying thousands of pounds more on their home loan bills.

It comes as experts warn the global economy is more likely to get worse than better.