The Bank of England said on Wednesday that it would temporarily buy British government bonds, after the new government’s fiscal plans roiled markets and sent borrowing costs soaring higher over the past few days.
Bonds with long maturities have been particularly affected, the central bank said. “Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” it said in a statement published on Wednesday that had an immediate effect on markets.
“The purpose of these purchases will be to restore orderly market conditions,” the central bank said. “The purchases will be carried out on whatever scale is necessary to effect this outcome.”
The yield on 10-year British government bonds on Wednesday climbed as high as 4.58 percent — the highest since early 2008 — before the central bank’s statement. Thirty-year yields had exceeded 5 percent for the first time since 2002.
Bond yields dropped sharply after the announcement, which said bond auctions would take place from Wednesday until Oct. 14. The 30-year yield fell by more than half a percentage point.
The speed of the rise in bond yields had disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.
Just last Thursday, the Bank of England had announced a plan to sell bonds back to the market as it tried to end the long era of easy money in its fight against inflation. But on Friday, the government’s announcement of a sweeping plan to cut taxes and increase government borrowing, presented without an independent fiscal and economic assessment, sent investors fleeing from British assets. The pound fell to a record low against the U.S. dollar, and traders suspected that the central bank would be forced to raise rates quickly, which pushed up short- and long-term borrowing costs.
The drop in the pound and the rise in bond yields prompted both the central bank and Treasury to put out statements in an effort to soothe markets on Monday. Still, bond yields kept climbing.
On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November.