The Bank of England has been forced to intervene in bond markets following the recent selloff.
The BOE will carry out temporary purchases of long-dated governments bonds from Wednesday in order to restore orderly market conditions. “The purchases will be carried out on whatever scale is necessary to effect this outcome,” it said in a statement.
“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.
“This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. 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.”
The Bank added that it “stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses”.
Naeem Aslam, chief market analyst at Think Markets, said: “A new era has started, markets are unstable, economic situations are dire, and the reputations of lawmakers have been shredded into pieces. This is the view among the traders who are looking at the UK’s fixed income and forex markets.
“The BOE’s announcement has shown that the water has gone above their head, and they need to do whatever it takes to bring the borrowing cost down. The initial announcement has brought some relief in the UK guilt market, but sterling has become even more volatile. Now, the anticipation is that if the current move doesn’t bring a temporary stop to the current bleed, the next step will be the un-scheduled announcement of an interest rate hike.”
