LONDON - The Bank of England (BOE) acted again on Tuesday to stem a sharp sell-off in Britain's £2.1 trillion (S$3.3 trillion) government bond market by announcing the purchase of inflation-linked debt until the end of this 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 of index-linked debt per day, starting on Tuesday.

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

The move and the increased warnings from the central bank represent another embarrassment for Prime Minister Liz Truss, whose economic agenda in September sparked a collapse in international investor confidence towards British assets.

UK bond yields soared and the pound tumbled to a record low against the US dollar since Ms Truss unveiled debt-fuelled tax cuts in a budget in September.

On Monday, British inflation-linked gilts - known as linkers - suffered a massive sell-off despite the BOE doubling the maximum size of its buy-backs 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."

Investors in British government debt are worried about what will happen to the market after most of the BOE's emergency support measures end on Friday.

Index-linked gilts are typically held by pension funds which have been scrambling to raise cash after Finance Minister Kwasi Kwarteng in September sparked a bond rout with plans for unfunded tax cuts.

Pension funds were forced to stump up emergency collateral in liability-driven investments (LDI), which use derivatives to safeguard against shortfalls in pension pots, after British government bond yields rocketed.

To halt free-falling prices, the BOE was forced to pledge to buy as much as £65 billion of long-dated government bonds.

Tuesday's announcement comes a few hours before Britain's Debt Management Office will attempt to sell £900 million of a linker due in 2051 into the market. REUTERS