LONDON, Oct 11 (Reuters Breakingviews) - The Bank of England is fighting more and more fires. On Tuesday, the UK central bank said it would buy more bonds to avert a fire sale by pension funds. But its plan to end such support on Friday is hampered by a distressed bond market, and wayward government.

Governor Andrew Bailey’s move to buy bonds on Sept. 28 was more a precision strike than a central bank bazooka. Prime Minister Liz Truss’s unfunded plan to cut taxes had triggered a surge in government bond yields, which in turn forced indebted pension funds to sell assets. Rather than hoover up every bond on the market, the bank offered to buy only the most battered long-dated securities and at cheap prices. That was enough to help the funds honour cash calls but not bring down yields. By not intervening more aggressively, the BoE could argue that it was neither funding a wayward government nor backtracking on its pledge to fight inflation.

Yet the latest announcement illustrates how tricky that balancing act is. Bailey has consistently had to expand support since late September. On Tuesday, he moved to buy index-linked bonds, and delayed long-planned sales of corporate debt from the bank’s old pandemic-era interventions.

There are plenty of signs that the bond market remains distressed. UK 10-year gilt yields , which have so far not been in the bank’s sights, surged around 30 basis points on Monday. The gap between the price at which banks will buy and sell gilts is above 5 basis points, up fivefold from a year ago, according to ING analysts. Company borrowing costs are surging too: even low-risk investment grade UK corporate bond yields exceeded 7% on Monday, according to an ICE Bank of America index, which was more than 1.5 percentage points higher than before Truss’s so-called mini-budget.

Things may not get much better. Chancellor Kwasi Kwarteng has pledged to bring forward to Oct. 31 a plan to cut borrowing over the medium term. Yet the fallout from his budget means he would need to cut spending by 62 billion pounds by 2026 in order to stop debt from rising relative to GDP, according to the Institute for Fiscal Studies, more than the tax cuts announced last month. That looks politically implausible.

Without a credible fiscal strategy, investors may continue to steer clear of UK gilts. The Bank of England could come under more pressure to help, by extending its purchases beyond next week, or else not trimming its balance sheet as planned. The alternative may be more market flashpoints, or a worse than necessary recession. Yet the more help Bailey provides, the more he will be accused of propping up a broken administration.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.)

CONTEXT NEWS

The Bank of England acted again on Oct. 11 to stem a sharp selloff in Britain’s 2.1 trillion pound ($2.31 trillion) government bond market by announcing the purchase of inflation-linked debt until the end of the week.

Citing a “material risk” to financial stability arising from a rout in British government bonds – known as gilts – the BoE said it would buy up to 5 billion pounds ($5.51 billion) of index-linked debt per day, starting Oct. 11.

Rather than increase the existing commitment to buy up to 10 billion pounds of gilts each day, as announced on Oct. 10, the purchases will run alongside existing purchases of long-dated conventional bonds, now worth up to 5 billion pounds.

British inflation-linked gilts – known as linkers – suffered a selloff on Oct. 10, despite the BoE doubling the maximum size of its buybacks of conventional long-dated gilts.

“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.”

Ten-year UK gilt yields were trading at 4.46% as of 0954 GMT on Oct. 11, after opening at a similar level. For most index-linked gilts, especially longer-dated ones, yields fell between 3 and 10 basis points in early trade, Reuters reported, compared with increases of more than 70 basis points for many linkers on Oct. 10.

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