The FTSE 100 once more gave up ground on Tuesday after the latest steps by the Bank of England to support the UK bond market and avoid what it called a ‘fire sale’ of UK bonds.
“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the Bank of England said in a statement.
The FTSE 100 was down 1% at 6,890 at the time of writing, while the UK 10-Year Bond yield fell to 4.41%.
The Bank of England action was reportedly a result of pressure by pension funds to include index-linked bonds to the bank’s bond purchases.
Index-linked bonds are widely held by pension funds, and having suffered huge losses this year, some pension funds are experiencing complexities meeting their liabilities.
“The fact the Bank of England has widened its support measures for the market by including index-linked gilts in its programme of government bond purchases will only serve to worry investors even more,” says Russ Mould, investment director at AJ Bell.
“So far, its support measures haven’t kept a lid on gilt yields as they have continued to creep up in recent sessions, thereby increasing the cost of borrowing for the government. And today’s news only triggers a very small retreat in yields.
“The Bank of England hopes to avoid a crisis in the market by being a willing buyer of bonds from pension funds who are under pressure. These pension funds will welcome today’s move, but whether the broader market shares the same enthusiasm remains to be seen.”
Early signs were that the market did not share the bank’s enthusiasm.
Shares in asset managers, insurance companies and wealth managers were down substantially on Tuesday following the latest round of action by the Bank of England.
Aviva was the FTSE 100’s top faller down 3.9% as St James’s Place, Phoenix Group and Hargreaves Lansdown all gave up more than 2%. Legal & General shares shed 3.2% and are now off 37% so far in 2022.