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  • Writer's pictureAlastair Hoyne

Finanze® Daily Digest - 10/10/2022

The Brief: The Bank of England (BoE) has announced today that it will continue to support the bond market by doubling its daily buying operations to a maximum of £10 billion. This follows after only closing eight transactions since it launched the program last month. In addition, the central bank will launch the Temporary Expanded Collateral Repo Facility to help banks ease their liquidity pressures from liability-driven investment (LDI) client funds. The BoE also added that it will continue to work with regulators and public authorities to ensure that the LDI industry remains stable.

Why It Matters: Since the BoE intervened in the market, it has gradually restored investor confidence although there’s still a long way to go before market stability is achieved. The BoE helped avert a major financial disaster preventing a large number of gilts (which are held as collateral by banks and lent to LDI funds) from being sold. Market uncertainty forced pension funds to fund margin calls on their devalued portfolios, which pushed gilt yields further. The higher gilt yields are, the higher mortgage rates for fixed and variable loans will be.

Finanze® Foresights: The BoE’s quantitative easing measures benefit mortgage holders by pushing down gilt yields with the intention of lowering the cost of borrowing. So, when UK pension funds that rely on LDIs were forced to sell down their positions when bond prices dropped (so they can continue paying people’s pensions with cash), the BoE had to step in to buy bonds and keep interest rates down. But be aware that this move is intended to buy the BoE time for them to institute additional measures to reduce the turmoil in the market. Eventually, the central bank will have to revert to quantitative tightening. Given the volatility in the economy and expectations of further interest rate hikes, mortgage holders will be waiting a lot longer before rates show any sign of decreasing.

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