Written by David Milliken
LONDON (Reuters) – The Bank of England said on Wednesday it will buy as many longer-dated government bonds as needed between now and October 14 to stabilize financial markets, after British gold prices fell since the government’s financial statement on Friday. .
Citing potential risks to the UK’s financial stability, the Bank of England also said it would delay the start of a program to sell its 838 billion pounds ($891 billion) of government bonds, which was due to start next week.
It added that it remained committed to reducing £80 billion over the next 12 months in bond holdings purchased under the quantitative easing program in the wake of the global financial crisis and during the COVID-19 pandemic.
UK 30-year bond yields hit their highest level since 2002 on Wednesday, before the Bank of England’s announcement, and traders complained that it was becoming increasingly difficult to buy and sell bonds as no one wanted to risk owning such a volatile asset.
The Bank of England said it had no choice but to intervene. The Treasury said it would compensate for the operations.
“If the dysfunction in this market continues or worsens, there will be a material risk to financial stability in the UK,” the Bank of England said. “This will lead to an unjustified tightening of financing conditions and reduce the flow of credit to the real economy.”
The central bank has not set a fixed limit on the scale of its intervention.
“The purpose of these purchases is to restore orderly market conditions. Purchases will be made of whatever size is necessary to influence this outcome.”
The Bank of England last intervened in the gold market to stem market turmoil in March 2020, when the pandemic disrupted markets, leading to an expansion of a dormant quantitative easing program by hundreds of billions of pounds.
In contrast to that time, the Bank of England said on Wednesday that the intervention would be entirely temporary and would “be phased out in a smooth and orderly manner once the risks to market performance are judged to have receded.”
However, the intervention had an immediate effect on the market. Thirty-year Treasury yields are down about 50 basis points, reversing Tuesday’s losses but still well above their level at the end of last week.
Markets were hesitant about the unfunded tax cuts that formed part of new Finance Minister Kwasi Kwarting’s first financial statement on Friday.
said Charles Diebel, Head of Fixed Income Strategy at Mediolanum Asset Management.
(dollar = 0.9406 pounds)