In a letter to the Treasury Committee, the Bank of England (BoE) has written that “liquidity conditions were very poor in the run-up to the BoE Gilt intervention“.
“The move in Gilts yields last week threatened to exceed the size of the cushion for many LDI funds.”
“The market appreciation has been largely orderly so far, but pressures have been observed in some parts of the financial system“.
“But there has been no widespread crystallization of financial stability risks.”
“Had the BoE not intervened, a large number of pooled LDI funds would have been left with a negative net asset value and they would have had to deal with the scarcity of collateral deposited with bank counterparties”.
“The bank acted to restore the basic functioning of the market and reduce material risks to financial stability and contagion from credit conditions for UK households and businesses.”
“The central bank operation is intended to give the affected ILD funds time to put their positions on a sustainable basis, increasing their resilience to future stress.”
“The bank is studying market conditions and demand patterns and will continue to use reserve pricing to ensure the tool’s support objective is met.”
“Once the purchasing program is finished, the operation will be undone in a smooth and orderly manner, once the central bank considers that the risks to the functioning of the market have diminished.”
Source: Fx Street