The Bank of England has warned of “a material risk to UK financial stability” as it widened its programme to buy up government bonds.

The move has been made as a result of “further significant repricing of UK government debt” in one pension-linked market, the Bank said.

It added that it was “dysfunction” and the “prospect of self-reinforcing ‘fire sale’ dynamics” that posed a “material risk to UK financial stability”.

The market worrying the Bank is the trade in index-linked gilts, government bonds with interest payments in line with inflation.

In the wake of the chancellor’s mini-budget the Bank had been buying up long-dated gilts – a type of government bond that make up a large proportion of pension pots – to steady market jitters about the government’s financial management.

On Monday the Bank announced a potential doubling of the amount it was willing to spend every day on long-dated gilts.

Tuesday morning’s announcement extended its intervention again, by pledging to buy up index-linked gilts.

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It comes after the cost of government borrowing continued to rise yesterday.

Gilt yields, the interest rate payable on government bonds, rose on Monday, near the 5% highs of 27 September, the day before the Bank made its first intervention.

The Bank announced on 28 September a temporary and emergency buying programme of long-dated gilts that are to be repaid in 20 to 30 years time, in the wake of chancellor Kwasi Kwarteng’s mini-budget announcement.

Read more: What are bonds, how are they different to gilts and where do they fit in the mini-budget crisis?

Bond buying period due to end on Friday

Market turmoil that stemmed from the mini-budget led to the unprecedented intervention from the regulator to prevent part of the pension market collapsing as the cost of interest on gilts surged.

The so-called yield fell back at the time of the Bank’s intervention but has risen steadily since.

The temporary, 13-day bond buying period is still due to end on Friday 14 October.

It is hoped the decision to again expand purchasing to index-linked gilts will “act as a further backstop to restore orderly market conditions”, the Bank said.

It added: “The Bank continues to monitor developments in financial markets very closely.”

The pound fell against the dollar for a fifth day but not to the level it was last week and the FTSE was also down, but not as much as some other markets.

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