Bank of England intervenes to end bond market panic

Just days after Chancellor Kwasi Kwarteng’s ‘explosive’ budget sent bond markets into a spin, the UK’s central bank has been forced to step in and try to steady the ship.

The Bank of England has announced plans to intervene in the bond market by temporarily buying an unlimited amount of long-dated government bonds from today until 14 October, as it attempts to offset some of the recent sell-off in the bond market and calm volatility in financial markets.

The central bank’s intervention has helped lift UK bond (gilt) prices and reduce bond yields, which move inversely to price.

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The chancellor’s mini-budget on Friday resulted in a sharp slump in UK bond prices, as well as the pound, amid concerns about the high levels of government borrowing required to carry out his pro-growth economic strategy of tax cuts, deregulation and spending. Rising bond yields mean that investors are less willing to invest in government debt, so they need greater compensation to own these bonds.

Threadneedle Street said: “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.”

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Although the central bank refrained from an emergency rate hike to offset the slide for sterling in foreign exchange markets, it has now intervened in the bond market. Yields dropped in response, with a flattening of the yield curve and long-dated bonds rallying. The Financial Policy Committee has a mandate to ensure the stability of the financial system, which is why it has stepped in today by buying 30-year gilts.

The intervention has resulted in some respite for this week’s bond market volatility, and the Bank of England has demonstrated its resolve to restore order to fixed income markets.

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The Monetary Policy Committee is expected to carry out a jumbo rate hike at the start of November, but the pound remains under pressure. Despite a brief pause in the selling yesterday, the downtrend for cable continues with GBP:USD shedding more than 20% this year.

European stock markets have pulled back from session lows, with the FTSE 100 now down a more modest 0.5%, having fallen by more than 1.5% earlier today. Many more UK stocks have turned positive on the day, with housebuilders such as Land Securities Group (LSE:LAND), Berkeley Group Holdings (The) (LSE:BKG), Barratt Developments (LSE:BDEV) and British Land Co (LSE:BLND) outperforming at the top of the UK index thanks to the bond market rally and corresponding fall in yields.

Conversely, the pullback in yields is weighing on stocks in the banking sector like Barclays (LSE:BARC) and Standard Chartered (LSE:STAN), as well as insurance companies such as Legal & General Group (LSE:LGEN) and Aviva (LSE:AV.), which benefit from higher yields.