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Wednesday's report comes a day after the British central bank's
governor, Andrew Bailey, said he had no intention of extending
purchases of bonds beyond the deadline.
Sterling bounced 0.4% to $1.1008 after the report and was last
up 0.28%.[FRX/]
"The risk is the pound quickly reverses the move if BoE
officials deny the report," Commonwealth Bank of Australia said
in a note.
"Either way, the pound is likely to remain volatile and is at
risk of sudden drops because of uncertainty about government
debt sustainability and the dislocation in UK pension
(superannuation) funds that has spilled over into UK government
bond market."
The central bank has made numerous attempts over the past two
weeks to try and restore order in markets, after the surge in
yields last month threatened to overwhelm pension schemes that
had loaded up on leveraged derivatives.
Pension funds meanwhile have been trying to raise cash by
selling off UK government, index-linked and corporate bonds.
The heavy selloff in gilts has pushed 10-year yields up by 100
basis points since Finance Minister Kwasi Kwarteng unveiled his
economic plan and controversial tax proposals.
"They (representatives from the central bank) told us that they
were watching the LDI managers closely to see whether they had
managed to generate enough liquidity for their clients to cope
with margin calls and would decide whether to extend the
facility on Thursday or Friday,” the FT quoted one banker as
saying.
The BoE on Tuesday expanded its programme of daily bond
purchases to include inflation-linked debt, citing a "material
risk" to British financial stability and "the prospect of
self-reinforcing 'fire sale' dynamics".
By buying bonds, the BoE is seeking to reverse what it sees as
"dysfunction" in the bond market. Specifically, the central bank
is seeking to address problems facing pension funds. They were
forced to stump up vast amounts of emergency collateral in
liability-driven investments (LDI), which use derivatives to
hedge against shortfalls in pension pots, after gilts dropped
sharply in value.
(Reporting by Shubham Kalia in Bengaluru, Ankur Banerjee and
Vidya Ranganathan in Singapore ; Editing by Kim Coghill & Simon
Cameron-Moore)
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