The Bank of England has announced it will “carry out temporary purchases of long-dated UK government bonds”.
Here’s what that means.
Bonds are “IOUs” issued by the government. Selling bonds is how governments borrow money from the international markets.
Bonds are often called gilts in the UK because we used to “guild” the edges (i.e., line them with gold).
UK bond prices crashed after Kwasi Kwarteng’s not-so-mini budget on Friday. The markets were apparently worried about how much extra borrowing the new chancellor was committing to.
More borrowing means the government has to issue more bonds. With an increased supply, the value of each individual bond would go down.
Traders didn’t want to hold on to bonds if they expected them to fall in value in the future – so they sold them. That meant the supply rose anyway, and the value of each bond dropped.
So the Bank of England said today that it will buy up as many bonds as is needed to “restore orderly market conditions”. In other words, to bring the price of bonds back to normal, stable levels.
But why does the Bank of England – or the government, for that matter – care if bond prices are low or volatile? The answer is that bond prices are important for some types of pension fund.
A sudden drop in bond prices is bad for pension funds (in the short term, at least) because of the complex ways they try to insure themselves against changes in the market.
The upshot is that, without the Bank of England’s intervention, some pension funds could have run out of money.
The background to all of this is complicated. Here’s the FactCheck beginner’s guide to why the pound has fallen, why mortgage rates could rise and what it means for the cost of living.