The Bank of England was compelled to intervene in government bond markets last week amid fears that a £50 billion fire sale could trigger a financial crisis, according to a letter from deputy governor Sir Jon Cunliffe to MPs. The intervention aimed to prevent a 'self-reinforcing spiral' that could have led to a market meltdown following Chancellor Kwasi Kwarteng's mini-Budget on September 23.
Sir Jon warned that without the Bank's action, which included a bailout worth up to £65 billion, pension savers could have faced significant losses as the value of liability-driven investment (LDI) funds dwindled to zero. LDIs are used by final-salary pension schemes to hedge against interest rate and inflation movements, but a plunge in gilt values forced pension funds to sell assets, exacerbating the decline.
The deputy governor attributed the gilt market turmoil directly to the mini-Budget, which raised investor concerns about the scale of borrowing needed to fund tax cuts. He noted that the rise in gilt yields was 'more than twice as large as the largest move since 2000'. The Bank has so far purchased £3.8 billion in gilts as part of its intervention.
Chancellor Kwarteng has disputed the Bank's assessment, arguing that market volatility was driven by global factors such as rising US interest rates and recession fears. Meanwhile, he held crisis talks with mortgage lenders as the average five-year fixed rate mortgage reached 6.02 per cent, the highest since February.
