The Bank of England sought again to stem a sharp sell-off in Britain's 2.1 trillion pound government bond markets today, expanding its emergency buying to inflation-linked debt.
Citing a "material risk" to financial stability after pension firms were hit by the turmoil, the BoE split its programme to buy up to 10 billion pounds of British gilts each day to include up to 5 billion pounds of index-linked bonds.
The expansion of the purchase programme was the BoE's fifth attempt to quell market turmoil in just over two weeks, including verbal interventions, and marked another embarrassment for Prime Minister Liz Truss whose economic agenda last month sent investors heading for the exit.
Inflation-linked gilts, typically held by pension funds and known in the market as linkers, suffered another big sell-off on Monday as the end to the BoE's programme on Friday approached.
"The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts," the BoE said in a statement.
"Dysfunction in this market, and the prospect of self-reinforcing 'fire sale' dynamics pose a material risk to UK financial stability."
At its first buy-back of inflation-linked bonds on Tuesday, the BoE bought 1.95 billion pounds' worth of linkers, the largest single operation of the programme so far, but as in previous days less than the maximum it had set. It bought 1.36 billion pounds of standard long-dated bonds in a second operation of the day.
The broader government bond market was more stable than on Monday, although 30-year bonds extended their price slide.
At an auction on Tuesday, Britain's Debt Management Office had to offer investors the highest return since 2008 to help sell 900 million pounds of index-linked gilts due in 2051.
A pensions industry group urged the BoE to extend its bond-buying support beyond its Oct. 14 deadline, and possibly beyond the end of this month.
"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," the Pensions and Lifetime Savings Association said.
Pension funds have scrambled to raise cash since finance minister Kwasi Kwarteng sparked the bond rout on Sept. 23 when he announced the government's plans for unfunded tax cuts.
The funds were forced to stump up emergency collateral in liability-driven investments (LDI), which use derivatives to hedge against shortfalls in pension pots, after gilts dropped sharply in value.
Many did so by selling gilts, sparking a vicious cycle of falling prices that forced the BoE to pledge to buy as much as 65 billion pounds of long-dated government bonds between Sept. 28 and Oct. 14.
"It's a big hole," a pension industry consultant said of the latest moves in markets.
Kwarteng told parliament he was committed to "getting to the bottom" of what happened in the long-dated gilt market.
Some gilts have lost more than 75% of their value this year.
Investors are worried about what will happen to the market after most of the BoE's emergency support measures end.
"Eventually, the gilt sell-off could force the BoE back into the market," Antoine Bouvet, a strategist at ING, said.
The British central bank has postponed until October 31 the start of its sales of gilts - a big step in the unwinding of its quantitative easing (QE) stimulus push over the past decade - in order to launch the emergency purchase programme.
Investors are waiting to hear from Kwarteng on how his economic growth plans will be funded, with a major statement and new official economic forecasts also due on October 31.
The International Monetary Fund's chief economist said on Tuesday that Kwarteng's push for growth and the BoE's attempts to control inflation were akin to people trying to steer a car in different directions.
"That's not going to work very well," Pierre-Olivier Gourinchas told a news conference.
Bank of England Governor Andrew Bailey is due to speak at a event in Washington later on Tuesday.
The BoE temporarily paused sales of its corporate debt holdings, reflecting broader trouble in British financial markets.
The IHS Markit iBoxx Sterling Corporate Bond Index fell on Monday to its lowest level since 2016.
Simeon Willis, chief investment officer of pension consultants XPS, said he had seen pension funds selling "across the board" to find liquidity.
"We have seen some property funds respond to that, we have seen credit spreads widen, we have seen equities fall - we have seen them coming out of all asset classes," he said.