Rout in bond markets stems from the government’s determination to push through the biggest package of unfunded tax cuts in half a centuryA commuter emerges from the London Underground near to the Bank of England, in London, Britain, September 26 2022. Picture; PETER NICHOLLS/REUTERS
The plan to buy securities maturing in 20 years or more in daily tranches of up to £5bn had an immediate effect on the gilt market, putting yields on 30-year debt on track for the biggest drop on record. They earlier climbed to the highest since 1998. The BoE decided to intervene to get ahead of a potential crisis that could have hit within hours. It was concerned collateral requirements on liability-driven investment strategies, such as those at pension funds, would have turned many into forced sellers of long dated gilts, according to a person familiar with the situation.
The BoE’s intervention, which will be financed by the creation of new reserves, is effectively open-ended quantitative easing , and is in contrast to its previous rounds of buying which saw officials set a distinct target. QE was one of the policies criticised by Truss and her supporters during the summer’s leadership contest.
Even so, it will have consequences for monetary policy and could mean officials decided they need to act in a bigger way in November, when markets are pricing in 175 basis points of rate increases. The return to bond buying comes just days before the BoE was due to start selling the mammoth holdings of government securities it built up since the financial crisis, which peaked at £875bn. It said it would now postpone the plan until October 31, but the annual target for an £80bn reduction was unchanged.