A U.K. trade body for the pensions industry has urged the Bank of England to extend its emergency action to purchase bonds to prop up the market.
The Pensions and Lifetime Savings Association welcomed the Bank of England’s intervention on Tuesday — it’s now added a new type of bond it will buy — but has warned that many pension funds are concerned that the emergency period “should not be ended too soon” and urged the central bank to prolong the aid until Oct 31 “and possibly beyond.”
The yield on the 30-year gilt
was mostly steady on Tuesday but has climbed some 80 basis points in recent days.
The comments come as the Bank of England on Tuesday announced it would expand its daily U.K. bond purchase operations to include index-linked gilts but reiterated the program is scheduled to end Friday.
That’s the second move this week to calm down bond volatility. On Monday, the Bank of England said it would expand the size of its daily gilt purchases and launch further measures to taper the end of its emergency bond-buying plans.
“These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity,” the BoE said in a statement on Tuesday.
The PLSA said the plans were a “positive additional intervention” and “generally effective” but as the end of the buying program draws closer, it said that market confidence remains low.
“A key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on Oct. 31 and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility,” they said.
Were the central bank to act on the advice, it would set up Halloween as a major day for financial markets, as it’s also the day when the U.K. Treasury will publish an independent review into its budget plans and lay out its plan to cut costs.
The Bank of England stepped in earlier last month, when the gilt yields were spiralling after the mini-budget, putting at risk pension funds with some £1 trillion invested in liability-driven investment strategies.
The trade body said most of their funds used the strategies sensibly.
“Our analysis suggests that the majority of pension funds used LDI in a prudent manner and with sensible arrangements to meet calls for collateral if normal market conditions, or those under prudent stress scenarios, prevailed,” they continued.
They added that regulators and the industry must address the risks from possible cases of LDI providers not having “sufficient financial resilience” or if gearing turned out to be too high.