The Bank of England (BoE) stepped in to stabilize the UK bond market on Wednesday and said it would buy as many long-dated government bonds as necessary between now and Oct. 14.
This decision came after a decline in British gilt prices following a government fiscal statement on Friday.
The BoE also announced it will postpone the start of a program to sell down its 838 billion pounds ($891 billion) of holdings in government bonds, which was scheduled to begin next week. The BoE cited potential threats to the financial stability of the UK.
It further stated that it remained committed to cutting its holdings of bonds purchased during its quantitative easing program in the wake of the global financial crisis and during the COVID-19 pandemic by 80 billion pounds over the course of the coming 12 months.
Before the BoE announcement on Wednesday, British 30-year bond yields reached their highest level since 2002. Dealers said it was getting harder and harder to purchase and sell bonds because nobody wanted to take the risk of keeping such a volatile asset.
The BoE said that it was forced to step in. The Treasury promised to defend the operations.
The BoE stated that there would be a “material risk to UK financial stability” if the market dysfunction persisted or got worse. As a result, “financing conditions would become unnecessarily tighter and the flow of credit to the real economy would decrease.”
However, the size of the central bank’s intervention was not constrained by any set parameters.
It announced that the purchases would be made in order to bring the market back to order. Also, the acquisitions would be made on the scale required to achieve the appropriate result.
According to a statement released by the BoE on Wednesday, the intervention would be wholly short-term and “unwound in a seamless and orderly manner once threats to market functioning are assessed to have receded.”
Despite this, the intervention immediately affected the market. The 30-year gilt yields decreased by about 50 basis points, reversing Tuesday’s declines. But, they remained significantly higher than they were at the end of the previous week.
