When Kwasi Kwarteng’s mini-Budget sent UK government bonds plunging, the chancellor said “markets will react as they will”. Five days later, the Bank of England stepped in to prevent chaotic drops in gilts prices from stinging pension funds and threatening financial stability.
A rout that began with Kwarteng’s package of energy subsidies and tax cuts had threatened to snowball out of control as a £1.7tn slice of the UK’s pensions sector — which dominates the market for long-term government debt — struggled to cope with the unprecedented rise in bond yields. The strategies that many pension schemes use to shield retirees from inflation and interest rate risks were buckling under the strain.
On Wednesday, with the turmoil at pension funds feeding a self-fulfilling downward spiral in gilt prices, the BoE halted plans to sell its bond holdings, and instead announced bond purchases at a pace of up to £5bn a day for 13 days to restore order.