Bank of England Expands Market Intervention to Avoid a 'Fire Sale'

[BumRushDaShow]

Last edited Tue Oct 11, 2022, 09:22 AM - Edit history (1)

Source: New York Times

The Bank of England stepped up its intervention in Britain’s bond market on Tuesday, the second expansion of its emergency measures in two days, as it warned of a “material risk” to the nation’s financial stability from dysfunction in part of the market. For the past two and a half weeks, Britain’s financial markets have faced turmoil after investors rebuffed the tax and spending policies of Prime Minister Liz Truss and her new government.

The pound dropped to a record low and bond prices fell, which caused bond yields to surge, leaving many Britons facing higher mortgage rates. The sharp rise in bond yields, especially for bonds with long maturities, left an investment strategy used by pension funds in disarray, as they were forced to sell bonds to raise cash for collateral. It was so bad that the Bank of England felt compelled to intervene by offering to buy bonds, and postponed its plans to sell off its debt holdings back to the market.

Initially, this helped bring bond yields down. But tumult has returned as traders wonder what will happen when the bond-buying operation ends on Friday. This week there has been a “further significant repricing” of government bonds, especially for inflation-linked bonds, the central bank said on Tuesday.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to U.K. financial stability,” it added in a statement. The bank said it still planned to end the bond-buying on Friday but would add inflation-linked debt to the assets it was willing to buy — up to 20 billion pounds — in the final week of the program. The decision comes just a day after other efforts by the central bank and government to ease strain in markets.

Read more: https://www.nytimes.com/2022/10/11/business/bank-of-england-bond-market-fire-sale.html

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No paywall

[honest.abe]

1. It is starting to look like we are about to head into a serious global recession.

And Powell will do his part in making this happen by continuing his aggressive interest rate increases.

[SWBTATTReg]

2. Interesting...

So if the bank intervened, to buy bonds, this means that interest rate premiums would flow to the government instead of consumers that buy the bonds for investment.

That is, if the bonds were priced at a reasonable rate, to attract buyers for the bonds, that is, if a bond paid a 5% yield vs. a 10% yield (I know that rates like this are rather rare, high), more people would flock to the 10% yields.

My question is why then, is the government intervening? Buyers will come if the yields are enough to attract them.

Does this problem that they are facing due to them not having enough liquidity to cover themselves in cases like this?

I know that when we had our own real estate bust, banks here in the US had to build up substantial cash reserves (more than they had before) so they wouldn't experience such a liquidity drain in cases like this (companies fail, real estate booms and busts, etc.), the markets if reserves are strong enough would be able to handle such shocks.

Lessons learned in the past are forgotten so quickly, eh?

[muriel_volestrangler]

4. The interest flows to the Bank of England, which is separate from the government

like the Federal Reserve should not just be classed as "the government". The Bank prints money to make the purchases, and can then cancel the money either when it comes back as interest, or when it sells the bonds.

This is indeed a liquidity problem - pension funds were set up holding government bonds as a "safe" investment, but the rise in interest the market now demands from the incompetent Tory government (the "moron premium", as Paul Krugman calls it) has depressed the price of those bonds so quickly that it's gone beyond the expected bounds - they have to meet some margin calls on bonds, and have to sell more bonds to pay that, which is in danger of depressing the price more, into a downward spiral.

The problem is that British government has gone from "average medium sized developed country" to "basket case" in a few weeks, and thus government bonds are suddenly unsafe.

[SWBTATTReg]

7. The 'Moron Premium'...I like this name, it's apt. Thanks!

[FredGarvin]

5. Buying bonds easing

The BoE is buying bonds to protect bond owners and the equities markets.

Adding fire to the inflation fire for citizens.

[Backseat Driver]

3. Someone eventually needs to "pay the piper" but it won't be THEM, the owners,

when the governing lords exploit and manipulate regular homeowners' energy and trade costs to their fascist advantage, LOL! Be calm and God Save the New King, et al

[FredGarvin]

6. Another win for the ultra rich

Hyperinflation is in the offing for The UK