The Bank of England is signaling to lenders it is ready to extend bond purchases

The Bank of England has privately signaled to bankers it could extend its emergency bond-buying program beyond Friday’s deadline, according to people familiar with the discussions, despite Governor Andrew Bailey warning pension funds they have “three days left” before the support would have ended.

Bailey’s comments came late Tuesday as pension funds underpinned their derivatives strategies ahead of Friday’s “cliff edge.” The industry said it needed more time to avoid a repeat of the forced sale that prompted the BoE to launch the emergency support program.

Several bankers briefed by the BoE on Tuesday, before Bailey spoke, said officials are monitoring whether so-called liability-oriented investment managers, who help pension funds manage risk in their portfolios, have been able to accumulate enough cash reserves to serve their clients to allow this to meet margin calls.

But in remarks at an event organized by the Institute of International Finance in Washington, Bailey insisted the central bank “will be out by the end of this week.”

The BoE was forced to step in two weeks ago with a £65bn government bond-buying program to help pension systems caught in a vicious circle after Chancellor Kwasi Kwarteng’s ‘mini’ budget from the 23rd in gilts .

Central bank officials on Tuesday told some lenders they were prepared to extend the facility beyond the Oct. 14 end date if market conditions warranted, according to three people briefed on the talks.

“They told us they are monitoring LDI managers closely to see if they have managed to generate enough liquidity for their clients to handle margin calls and would decide whether to open the facility on Thursday or Friday would extend,” said one banker.

The mixed message from officials at the bank caused confusion in the sterling and gilt markets on Wednesday, with the pound recouping some of its losses following Bailey’s speech as investors bet the bank would continue its program beyond Friday .

Gilts continued to come under pressure on Wednesday, a sign of ongoing market nervousness. The yield on the 30-year gilt, which has been at the heart of the crisis, rose 0.08 percentage point to 4.89 percent, closer to levels seen before the central bank’s first intervention on September 28.

Philip Shaw, economist at Investec, said the BoE is struggling with conflicting goals as its financial stability measures – while not being implemented in the same way as quantitative easing – are still effectively “a form of simpler monetary policy”.

Peter Schaffrik, economist at RBC Capital Markets, said the BoE may have no choice but to extend its support for the gilts market and postpone plans for quantitative tightening because “when financial stability is threatened, it starts to see the others to override the objectives of a central bank”.

One banker, who was not briefed by the BoE, said: “If the market gets into trouble, they have to open [the programme] again.” Referring to Bailey’s comments, the person added that “it’s not helpful to make such a strong statement. Instead, they create a much bigger cliff.”

At the IMF in Washington on Tuesday, the head of financial stability noted that UK government bond yields are only likely to fall if the government reverses course on its unfunded tax cuts.

Tobias Adrian, the IMF’s financial adviser and head of its money and capital markets department, said the tax cuts had prompted markets to expect the BoE to hike interest rates more than expected. “Certainly, a change in fiscal policy would change the direction of interest rates going forward,” he said.

He backed the BoE’s targeted and temporary intervention with a deadline, saying longer-lasting measures to lower gilt yields would be inflationary unless the government changed course. “The BoE’s objective is price stability and that will stand in the way of sustained lower interest rates,” he said.