Antoine Bouvet, rates strategist at ING, said: “There is a new front in the war against gilt market dislocations: repo compression and short-term gilt scarcity.”
He said: “It is becoming more and more difficult to buy gilts at short notice or to borrow them via repurchase agreements (repo).
“The crisis had been brewing for some time due to heightened market volatility and investor risk aversion, but worsened when pension funds and other market participants decided to increase their liquidity in anticipation of the September/October gilt crisis.”
Bouvet said strong demand for the shorter bonds in the Bank’s first QT sale reinforces “the impression of a bond shortage” in this part of the gilt market.
Bank of England Governor Andrew Bailey admitted on Thursday that traders had pointed out ongoing problems in the market to officials.
Threadneedle Street was forced to buy billions of pounds of 30-year bonds to ease a pension fund crisis after the mini-budget market chaos. Liability-driven investment (LDI) funds rushed to respond to huge calls for funds to shore up their hedges following the surge in gilt yields.
The International Capital Market Association, which represents the biggest traders in the bond market, warned last month of a shortage of liquid assets in eurozone repo and money markets.