The Bank of England on Tuesday announced an expansion of its emergency bond-buying operation as it seeks to restore order to the country's chaotic bond market.
The U.K. government bonds will be included in the central bank's purchases during the month of October. The U.K. retail price index is used to benchmark payouts to bondholders.
The Bank increased the limit for its daily gilt purchases on Monday ahead of the end of the purchase scheme on Friday.
The Bank launched an emergency intervention after a sell-off in U.K. bonds threatened to collapse multiple liability driven investment funds.
There has been a further significant repricing of UK government debt. The potential for self-reinforcing fire sale dynamics poses a material risk to UK financial stability, according to the bank.
The U.K. 10-year gilt yield rose by 64 basis points on Monday. Thirty-year index-linked gilt prices were down 16% on the day, with the yield now at around 1.5%, having been at -1.5% just six months ago. Prices affect yields.
In developed world bonds, moves of this magnitude are very rare.
The Bank said Tuesday that the additional operations would act as a further backstop to restore orderly market conditions.
The additional index-linked gilt purchases will be indemnified by the Treasury.
The upper limit of the Bank's daily gilt purchases was set at $10 billion, of which up to $5 billion will be allocated to conventional gilts and the rest to index-linked gilts.
The size of auctions will remain under review, the Bank said, and all purchases will be unwound once risks to market functioning are judged to have subsided.
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