UK inflation-linked gilts saw an even worse price drop than Bitcoin, causing further excitement in the markets, it has been reported. The Bank of England on Tuesday tried to stem another sharp sell-off in £2.1 trillion in UK government bond markets by extending its emergency purchases to include inflation-linked debt. It came as gilts, normally held by pension funds and known in the market as linkers, suffered another major sell-off on Monday as the end of the BoE program on Friday neared.
The Financial Times stock market and finance blog Alphaville called the event “staggering” and “wild stuff” and wrote today that the longest-dated UK government bond on the market has lost 78.6 percent of its value since issuance.
That’s a harder drop than Bitcoin, which is currently down about 67 percent since last November.
Analyzing the current picture of the market, the FT wrote: ‘To us this shows two things. Firstly, that there has been a mass liquidation among the UK pension schemes which dominate the long term linker market and moreover long gilts in general as the UK’s admittedly poor economic and financial fundamentals would suggest.
“But second, when duration explodes, it can cause as much pain as a dumb cryptocurrency or a shaky junk bond.”
Other assets that have fallen less than the UK government bond include Ukraine’s GDP warrants, as reported by the FT.
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Citing a “material risk” to financial stability after bond firms were hit by the turmoil, the BoE split its program of buying up to £10bn of UK gilts a day to include up to £5bn of index-linked bonds.
The expansion of the purchasing program was the BoE’s fifth attempt to quell the market turmoil in just over two weeks, including verbal interventions, and marked another embarrassment for Prime Minister Liz Truss, whose economic agenda last month sent investors onto an exit path.
The BoE said in a statement: “Earlier this week saw another significant repricing of UK government bonds, particularly index-linked gilts. Dysfunction in this market and the prospect of self-reinforcing ‘bailout’ momentum pose material risk to UK financial stability.”
In its first buyback of inflation-linked bonds on Tuesday, the BoE bought £1.95 billion worth of linkers, the program’s largest single operation to date, but as in previous days, less than the maximum it had set. It bought £1.36 billion of long-dated standard bonds in a second operation of the day.
The broader government bond market was more resilient than Monday, although 30-year bonds continued to slide. At an auction on Tuesday, Britain’s Debt Management Office had to offer investors its highest yield since 2008 to help sell £900m of index-linked gilts maturing in 2051.
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A fixed income group has urged the BoE to extend its support for bond purchases beyond the October 14 deadline and possibly later this month. The Pensions and Lifetime Savings Association said: “A key concern for pension funds since the Bank of England’s intervention has been that the purchase phase should not be ended too soon.”
Pension funds have been scrambling to raise cash since Finance Minister Kwasi Kwarteng sparked the sovereign debt crisis on September 23 when he announced the government’s plans for unfunded tax cuts.
Funds have been forced to increase contingency collateral in liability-driven investments (LDI), which use derivatives to hedge against shortfalls in bond pots, after gilts plummeted in value.
Many did so by selling gilts, which set off a vicious cycle of falling prices that forced the BoE to buy up to £65bn worth of long-dated government bonds between 28th September and 14th October.
“It’s a big hole,” a fixed income adviser said of recent moves in the markets. Kwarteng told Parliament he was determined to “get to the bottom of what is happening” in the long-dated gilt market.
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