As such, it will become a temporary buyer of long-dated U.K. government bonds, starting Wednesday, with the aim of restoring "orderly market conditions."
With yields on U.K. gilts rising and prices falling, pension funds using liability-driven investment programs to hedge against interest rate moves are finding themselves on the receiving end of increased — and urgent — calls for more collateral to keep those hedges in place.
Yields on index-linked gilts have surged about 200 basis points in a matter of days, sources said.
"The Bank of England has stepped in as a buyer of last resort," Calum Mackenzie, investment partner at Aon, said in a telephone interview. "That has, for now, put a floor on bond prices, and at least in the short-term is buying pension funds breathing space to replenish their collateral."
Bethany Payne, global bonds portfolio manager at Janus Henderson, said in an emailed comment that while the BOE's intervention "is only a sticking plaster to a much wider problem," the bank's purchases of long-dated bonds, "and therefore showing willingness to restart quantitative easing when markets become jittery ... should provide some comfort to investors that there is a gilt yield backstop."
While the bank did not set an amount of gilts it will buy, it said purchases "will be carried out on whatever scale is necessary to effect this outcome."
The BOE's financial policy committee noted risks to U.K. financial stability from dysfunction in the gilt market, with repricing becoming more significant in the past day. "Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy," the release said. As such, the committee "welcomed the bank's plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace."
Auctions will take place until Oct. 14. "The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided," the release said.