The Bank of England has decided to intervene in the gilt market after days of chaos to avoid "a material risk to UK financial stability" by buying unlimited quantities of long-dated government bonds.
Markets had shrugged off the apparently co-ordinated statements from the Bank's governor, Andrew Bailey, and the Treasury on Monday that attempted to calm markets and shore up the pound, both of which had been in meltdown since the 'mini budget' announced by the government on Friday.
First emergency gilt auctions will take place today, the Bank said, and will take place until 14 October.
"As the Governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets,” the central bank said in a statement late on Wednesday morning.
"This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt, “ the BoE said.
"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.
"In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
"To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions."
These purchases will be carried out "on whatever scale is necessary" to restore orderly conditions, it said, with the operation "fully indemnified" by the Treasury.
These purchases will be temporary and will be “unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided”.
It said it has not changed the monetary policy committee's previously stated plan to reduce its stock of bonds by £80bn annually – so-called 'quantitative tightening' (QT) to clamp down on inflation – but added, "in light of current market conditions, the Bank’s executive has postponed the beginning of gilt sale operations that were due to commence next week."
The first QT gilt sale operations will take place on 31 October and proceed thereafter, Threadneedle Street said.
Following the budget announcement from new chancellor Kwasi Kwarteng, 30-year gilt yields had risen from 3.60% to almost 5.10% on Wednesday morning, which threatened financial stability by forcing pension funds to sell assets to meet cash collateral requirements.
The intervention saw yields on the 30-year gilt fall over 30 basis points from their high to 4.738% and reversing about half of the rise in recent days. Meanwhile, 10-year yields also fell from 4.55% to 4.15% and 2-year yields dropped from 4.70% to 4.35%.
Shares in the big life and pension companies Aviva PLC (LSE:AV.) and Legal & General Group PLC (LSE:LGEN) were both down around 8% before the intervention, which seemed to stop their slide only momentarily. L&G has lost 17% of its value since the min-budget, while Aviva has fallen 13%.
The big high street banks, Lloyds Banking Group PLC, NatWest Group PLC, Barclays PLC (LSE:BARC), HSBC Holdings PLC (LSE:HSBA) and Standard Chartered PLC saw their shares spike but remain in the red.
Housebuilding shares also perked up, with the likes of Barratt Developments PLC (LSE:BDEV), Bellway PLC (LSE:BWY), Berkeley Group Holdings PLC (LSE:BKG) and Taylor Wimpey PLC (LSE:TW.) climbing out of the red – before quickly giving up most of their gains.
A spokesperson for HM Treasury said: "Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions.
"These purchases will be strictly time-limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury.
"The chancellor 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."
Paul Dales, chief UK economist at Capital Economics, said: "The continued fallout this morning from the Chancellor’s mini-budget has forced the Bank of England to step in to avoid the early stages of a financial crisis."
"This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working."
But while long-term gilts yields are falling back, he said "the overall sense is that the downside risks to the UK economy are growing".
He said buying gilts meant the Bank was, "in other words, restarting QE, although for financial stability reasons rather than monetary policy reasons".
While the intervention was welcome, Dales said, "the fact that it needed to be done in the first place shows that the UK markets are in a perilous position. It wouldn’t be a huge surprise if another problem in the financial markets popped up before long. Either way, the downside risks to economic growth are growing. And the Chancellor’s 2.5% real GDP growth target is looking even more unachievable."