The Bank of England is intervening in the bond market after a tremendous sell-off

September 29, 2022: -The Bank of England will suspend the planned start of its gilt selling next week and temporarily buy long-dated bonds to calm the market chaos unleashed by the new government’s so-called “mini-budget.”

U.K. gilt yields were on course for their sharpest monthly rise since at least 1957 as investors fled British fixed income markets following the new fiscal policy announcements. The measures include large swathes of unfunded tax cuts that have drawn global criticism, which comes from the IMF.

On Wednesday, the Central Bank said it was monitoring the “significant repricing” of the U.K. and global assets recently, which has hit long-dated U.K. government debt hard.

“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability. This leads to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” the Bank of England said.

“In line with its money stability objective, the Bank of England indicates ready to restore market functioning and decreasing any risks from contagion to credit conditions for U.K. households and businesses.”

As of Wednesday, the Bank will begin temporary purchases of long-dated U.K. government bonds to “restore orderly market conditions” and said these would be carried out “on whatever scale necessary” to soothe markets.

On Wednesday, the Bank’s Financial Policy Committee acknowledged that the dysfunction in the gilt market posed a material risk to the country’s financial stability and opted to take immediate action.

The Monetary Policy Committee’s target of an annual £80 billion ($85 billion) reduction of its gilt holdings remains unchanged, the Bank said, with the first sparkling sales — initially slated for Monday — now taking place on October 31.

A U.K. Treasury spokesperson confirmed that the operation had been “fully indemnified” by the Treasury and said Finance Minister Kwasi Kwarteng is “committed to the Bank of England’s independence.”

“The Government will continue to work closely with the Bank in support of its financial stability and inflation objectives,” the spokesperson added.

The Bank said it will publish a market notice outlining the program’s operational details “shortly.”

Yields on U.K. 30-year gilts and 10-year gilts dropped by more than 30 basis points following the announcement.