‘Unused capacity’ in the Bank of England’s bond-buying programme means it is able to double the daily buying limit of its bond intervention from £5bn to £10bn.

Since its extraordinary intervention in the bond market on Wednesday 28 September to stabilise the economy, the Bank confirmed it has carried out eight daily auctions, offering to buy up to £40bn, though it has made only around £5bn of bond purchases.

It re-affirmed it intends to cease buying bonds (gilts) on Friday 14 October as originally announced.

Joshua Raymond, director at financial brokerage XTB, said the move to double the daily limit may not be positive.

He said: “I’m not so sure that this is a good sign to be frank. We should remember that market interventions of this type by the central bank are not normal. It is extraordinary and the fact the BoE needs to increase the daily level of liquidity for its remaining five auctions shows that its initial interventions were unsatisfactory.

“On the one hand, this does show the BoE are ready to act and be more agile than their previous responses to rising inflation has shown. On the other hand however, the fact they have had to increase its daily auction liquidity sizes suggests they may have lost some degree of credibility in the market.”

Bank of England bond intervention

The Bank of England was forced to step in and launch a bond-buying programme in a bid to calm fears of a pension fund sell-off following the Chancellor, Kwasi Kwarteng’s mini Budget just over a fortnight ago. Investors were spooked over multi-billion pound unfunded tax cuts, resulting in a bond sell-off. This drove down the price, pushing up gilt yields.

There were concerns that continuing or worsening “dysfunction” in the market, particularly around long-dated UK government debt could see a huge run on pension funds, similar to that seen by Northern Rock customers at the start of the financial crisis.

The Bank said it would buy government bonds on a temporary basis to help “restore orderly market conditions”.

Tom Selby, head of retirement policy at AJ Bell, explained: “Normally higher gilt yields are good news for defined benefit (DB) pensions because they push down the value of liabilities, which, all else being equal, should improve their funding position.

“However, lots of pension funds use LDI [liability driven investment] 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.”

‘Huge uncertainty once Bank steps back’

Selby added that as the Bank confirmed it will stop buying gilts on 14 October, “there remains huge uncertainty over the adjustment period once the Bank steps back from its emergency intervention”.

He said: “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.”