Bank of England £65bn Gilt intervention staved off UK financial spiral

The Bank of England has defended last week’s intervention in the UK government bond market, saying it stepped in to prevent a £50 billion fire sale of gilts that would have pushed the UK to the brink of a financial crisis.

The central bank said on Thursday pension funds had been forced to buy long-dated UK government bonds worth £50bn in a short period of time. This would far exceed the average daily trading volume of £12 billion.

The BoE’s defense of the £65bn program is the clearest sign yet of how close the UK came to market collapse following Kwarteng’s ‘mini-budget’ of £45bn in unfunded tax cuts.

Had the central bank failed to intervene, it feared a “self-reinforcing spiral” would have set in, threatening “serious disruptions in core funding markets and consequent widespread financial instability,” said Sir Jon Cunliffe, the BoE’s deputy governor for financial stability in a Letter to the Chair of Parliament’s Finance Committee.

The letter also details warnings received by the BoE ahead of its intervention. Cunliffe said that at the heart of a crisis in the UK pension fund industry, managers of liability-oriented investment strategies had warned as early as Friday September 23 that the huge moves in gilt yields would force them to sell large amounts of sovereign debt.