Bank of England signals to lenders it is prepared to prolong bond purchases

The Bank of England has signalled privately to bankers that it could extend its emergency bond-buying programme past Friday’s deadline, according to people briefed on the discussions, even as governor Andrew Bailey warned pension funds that they “have three days left” before the support ends.

Bailey’s comments late on Tuesday came as pension funds raced to shore up their derivative strategies before Friday’s “cliff edge”. The industry has said it needs more time to avoid a repeat of the forced selling that prompted the BoE to launch the emergency support scheme.

Several bankers briefed by the BoE on Tuesday before Bailey spoke said that officials were watching whether so-called liability-driven investment managers, which help pension funds manage risks in their portfolios, have been able to build up enough cash reserves to enable their clients to meet margin calls.

But in remarks at an event organised by the Institute of International Finance in Washington Bailey insisted the central bank “will be out by the end of this week”.

The BoE was forced to step in two weeks ago with a £65bn programme to buy government bonds in order to help pension schemes that have been caught up in a vicious circle after chancellor Kwasi Kwarteng’s September 23 “mini” Budget set off a historic sell-off in gilts.

Representatives from the central bank informed some lenders on Tuesday that it was prepared to extend the facility past the October 14 end date if market conditions demanded it, according to three people briefed on the discussions.

“They told us that they were watching the LDI managers closely to see whether they had managed to generate enough liquidity for their clients to cope with margin calls and would decide whether to extend the facility on Thursday or Friday,” said one banker.

The mixed messaging from the Bank’s officials caused confusion in the sterling and gilt market on Wednesday, with the pound reversing some of its losses from the aftermath of Bailey’s speech as investors bet that the Bank would continue its programme beyond Friday after all.

Gilts came under further pressure on Wednesday in a sign of persistent jitters in the market. The yield on the 30-year gilt, which has been at the centre of the crisis, rose 0.08 percentage points to 4.89 per cent, nearing levels hit before the central bank first intervened on September 28.

Philip Shaw, economist at Investec, said the BoE was battling with conflicting objectives, since its action on financial stability — although not conducted in the same way as quantitative easing — was still effectively “a form of easier monetary policy”.

Peter Schaffrik, economist at RBC Capital Markets, said the BoE might have little choice but to extend its support for the gilts market, and delay plans for quantitative tightening, because “if financial stability is threatened, it starts overriding the other goals a central bank has”.

One banker who had not been briefed by the BoE said that “if the market gets in trouble, they will have to open [the programme] again”. Referring to Bailey’s comments, the person added that “making such a strong statement is not helpful. Instead they are creating a much bigger cliff edge.”

At the IMF in Washington on Tuesday, the head of financial stability noted that the only way yields on UK government bonds were likely to come down was if the government reversed course on its unfunded tax cuts.

Tobias Adrian, the IMF’s financial counsellor and head of its monetary and capital markets department, said the tax cuts were leading markets to expect the BoE had to raise interest rates more than otherwise. “Certainly, a change in fiscal policy would change the trajectory of interest rates going forward,” he said.

Backing the BoE’s targeted and temporary intervention with a cut-off date, he said that more long-lasting action to bring down gilt yields would be inflationary if the government did not change course. “The BoE has the price stability objective and that is going to stand in the way of having permanently lower interest rates,” he said.