LONDON—The Bank of England expanded its support of pension funds at the heart of the U.K.’s bond-market crisis even as borrowing costs leapt higher, a sign that stress in the financial system wasn’t going away.
The U.K.’s central bank said Monday that it would increase the daily amounts it was willing to buy in long-dated bonds before ending the program as scheduled on Friday. It also unveiled two types of lending facilities aimed at freeing up cash for pension funds beyond the end of the bond buying.
The moves failed to calm markets, with yields on 30-year U.K. gilts, as government bonds are known, jumping to as high as 4.64%, from 4.39% on Friday. Outside the past two weeks such moves would be considered unusually large for a single day.
The Bank of England launched its initial foray into markets on Sept. 28 when it offered to buy up to £5 billion, or around $5.55 billion, a day of long-dated government bonds. The program was aimed at stanching the damage from a furious selloff in U.K. government debt over previous days in the aftermath of a surprise package of tax cuts announced by the government.
“The underlying message is that there’s been too little risk reduction so far,” said Antoine Bouvet, senior rates strategist at ING. “There’s a message to pension funds and potential sellers that the window is closing and they need to hurry up.”
He attributed Monday’s bond selloff to disappointment among investors who had expected the BOE to extend the bond-buying facility.
The original intervention in late September at first calmed markets, with government bond yields plunging in response. But yields shot back up in recent days after it appeared the bank was buying far less than the £5 billion a day, a possible sign that the program wasn’t working as intended.
In the history of crisis interventions, central banks often have to make multiple stabs at solving problems with different types of bond buying or lending programs before markets become convinced that a viable backstop has been created. During the Covid-19 meltdown in March 2020, the Federal Reserve expanded its lending programs several times before calm was restored.
The BOE said it would increase the daily amount of purchases on offer until the program ends, starting with £10 billion Monday, though it was unclear if there would be take-up by distressed sellers.
The lending programs announced Monday included what the BOE called a temporary expanded collateral repo facility. This lends cash to pension funds in exchange for an expanded menu of collateral than was previously available to the pension plans, including index-linked gilts, whose returns are tied to inflation, and corporate bonds.
The operations would be processed through banks working on behalf of the pension funds. The BOE also made an existing, permanent repo lending facility available to banks acting to help pension-fund clients.
The crisis centers on a corner of the market known as LDIs, or liability-driven investments. LDIs became popular in recent years among U.K. defined-benefit pension plans to make enough money in the long term to match what they owed retirees. These strategies use financial derivatives tied to interest rates.
LDIs also contain leverage, or borrowing, that amplifies pension-fund investments by as much as six or seven times. When the long-dated U.K. government bond yield that undergird LDI investments surged more than they ever have in a single day at the end of September, LDI fund managers required pension funds to post massive amounts of fresh collateral to back up the investments.
To generate that collateral, pension funds have been selling non-LDI bonds, stocks and other investments.
In a letter to lawmakers last week, BOE Deputy Gov.
Jon Cunliffe
said the bank acted to stop forced selling by LDI investors and a “self-reinforcing spiral of price falls.”
The point of the new lending programs and the bond buying is to make it easier for the pension funds to drum up cash so they can pay down the leverage on their LDI funds without causing wider market disruption.
“The Bank of England has been listening to schemes and the challenges they’re facing right now in still struggling to access liquidity quickly enough to recapitalize LDI,” said Ben Gold, head of investment at
a U.K. pensions consultant. The measures also help funds avoid having to sell assets at poor prices, he said.
Mr. Gold estimates that it is going to take between £100 billion and £150 billion for the industry to shore up its collateral on LDI funds.
“I would estimate that we’re probably about halfway there,” he said. “There is still a lot of activity that’s needed to get it done before 14th October.”
Soaring inflation and expectations of swelling government bond issuance pushed bond yields up sharply in recent months. Investors in U.K. government bonds were troubled by the tax cuts announced by Prime Minister
Liz Truss’s
government in part because they weren’t accompanied by a customary analysis of the impact on borrowing by the independent budget watchdog.
U.K. Treasury chief
Kwasi Kwarteng
on Monday said he would announce further budgetary measures on Oct. 31 that will be accompanied by forecasts from the Office for Budget Responsibility, which provides independent analysis of government spending. He previously said that wouldn’t happen until Nov. 23.
—Caitlin Ostroff contributed to this article.
Write to Paul Hannon at paul.hannon@wsj.com, Chelsey Dulaney at Chelsey.Dulaney@wsj.com and Julie Steinberg at julie.steinberg@wsj.com
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