Today, the Bank of England made a series of statements more likely to cause liquidity problems than solve them, at least in the short term.

(Click on image to enlarge)

UK 10-Year Bonds (GILTs) courtesy of Trading Economics

You Have Three Days

Yahoo!Finance reports BOE’s Bailey Has a Message for Funds.

Bank of England Governor Andrew Bailey urged investors to finish winding up positions that they can’t maintain, saying the central bank will halt intervention in the market as planned at the end of this week.

“My message to the funds involved and all the firms is you’ve got three days left now,” Bailey said at an event in Washington on Tuesday. “You’ve got to get this done.”

The Bank earlier on Tuesday expanded the range of its bond-buying program to include inflation-linked debt for the first time to avert what it called a “fire sale” that threatens financial stability. While the central bank has always said its support will end Friday, a lobby group representing UK pension funds had urged Bailey to extend the program at least until the end of the month.

The “essence” of an intervention to support financial stability “is that it is temporary,” Bailey said. “It’s not prolonged.”

Three-Point Synopsis

Market yields on UK "Gilts" surged on the news that Prime Minister Liz Truss' plan to slash taxes while boosting borrowing. (red arrow 1).

The Bank of England calmed the markets a bit by offering temporary liquidity (red arrow 2).

Then Yesterday, the BOE said it would extend that liquidity to inflation-protected securities called "linkers" 

Today, the BOE redefined temporary as get out of Doge in three days. The market had already sensed the move as yields reacted in advance (red arrow 3).

30-Year Index-Linked Gilt Cash Price

So who wants to step in front of that train?

Bank of England Warns of ‘Material Risk’ to UK Financial Stability

CNBC reports Bank of England intervenes in bond markets again, warns of ‘material risk’ to UK financial stability

• “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the Bank of England warned.
• The move marks the second expansion of the central bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme.
• “The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the bank said in a statement Tuesday.

Pound Dives 

The Guardian Reports Pound falls sharply against dollar after Bank confirms bond-buying end date

The pound has fallen sharply against the dollar after Andrew Bailey warned the Bank of England would not extend its emergency intervention in financial markets beyond this week, after the turmoil sparked by the government’s mini-budget.

Sterling skidded by more than a cent against the dollar to below $1.10 after the Bank’s governor insisted the £65bn scheme to purchase UK government bonds would not be continued beyond the deadline on Friday.

The central bank had started the day by saying it would revamp the scheme’s bond-buying firepower – within the existing timeframe – for a second time in as many days, warning there were still “material risks” in government debt markets affecting UK pension funds.

However, it ended with Bailey saying the intervention must end this week, telling an event organised by the Institute of International Finance in Washington: “We have announced that we will be out by the end of this week. We think the rebalancing must be done.

Timeline 

• September 6 - Reuters: Liz Truss Vows Tax Cuts After Winning Vote to be Next British PM
• September 25 - UK Independent: Liz Truss Warned on Tax Cuts 
• October 1 - BBC: Liz Truss Admits Disruption After Tax Cut Pledges 
• October 3 Reuters: Truss Forced Into U-turn on Tax After Week of Market Turmoil
• October 4 - Politico: Donald Trump Praises Liz Truss’ Tax Cuts
• October 5 - CNBC: Liz Truss Pledges Tax-Cutting Future in Landmark Speech Plagued by Protest and Political Infighting
• October 11 - The Guardian: Pound Falls Sharply Against Dollar After Bank Confirms Bond-Buying End Date
• October 11 - CNBC: Bank of England Intervenes in Bond Markets Again, Warns of ‘Material Risk’ to UK Financial Stability

Fire Sale

What's It Mean to Pensions?

Global Risk and a Word About Derivatives

Hoot of the Day

Question of the Day

Is anything broken yet?

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