Analysis: Don’t confuse symptoms with causes, the Bank’s hand was forced

Today’s emergency Bank of England support package for the City was triggered by turmoil in a very specific segment of the gilt market.

Since last Friday’s tax cutting and borrowing bonanza, rates on UK government debt have been going through the roof.

That has pushed bond prices down. The two move inversely.

That, in turn, has squeezed some pensioner managers’ balance sheets. 

Worried they would lose their cash, banks, brokers and other money managers demanded they stump up cash immediately to cover their losses.

Quite of lot these pension managers’ money is tied up in UK long-dated debt. So, they sold these bonds rapidly, accelerating yields.

This prompted the Bank to get involved. It is now buying as much as £65bn worth of long-dated government debt until mid-October. 

That, it hopes, will allow those pension managers to sell bonds at a price that reflects their actual value, preventing a fire sale that risked spreading to the real economy, much like the 2008 financial crisis.

But, all that wouldn’t have happened if the government’s fiscal credibility wasn’t being scrutinised.

Today’s fiasco was a symptom – not a cause – of the market chaos triggered by the mini-budget.