The Bank of England (BofE) has announced plans for temporary and targeted purchases in the gilt market at an "urgent pace", in an effort to "restore orderly market conditions" and financial stability following a recent surge in gilt yields.

Gilt yields faced ‘unprecedented’ increases amid the market reaction to the Chancellor’s fiscal statement, with pension scheme trustees urged to ‘brace’ for the new market environment, and review whether their collateral buffers remain adequate.

In its statement, the Bank of England acknowledged that the repricing of UK and global financial assets has become “more significant” in the past day, and is particularly affecting long-date UK government debt.

"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability," it stated. "This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy."

In line with its financial stability objective, the Bank of England has therefore announced new interventions, stating that it is "ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses".

As part of this, BofE will carry out temporary purchases of long-dated UK government bonds from 28 September, with the purpose of these purchases being to restore orderly market conditions.

The purchases will be carried out on "whatever scale" is necessary to effect this outcome, and will be fully indemnified by HM Treasury.

However, the Bank emphasised that these purchases will be strictly time limited, as they are intended to tackle a specific problem in the long-dated government bond market, with purchases to be unwound in a "smooth and orderly fashion" once risks to market functioning are judged to have subsided.

In light of current market conditions, the Bank’s Executive has also postponed the beginning of gilt sale operations that were due to commence next week, with the first gilt sale operations to take place on 31 October and proceed thereafter.

The statement confirmed that the Monetary Policy Committee will make a full assessment of recent macroeconomic developments at its next scheduled meeting and act accordingly.

It also confirmed that MPC "will not hesitate" to change interest rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit.

Aegon Asset Management head of rates, Sandra Holdsworth, explained that the intervention was introduced to stop "a vicious spiral", as selling in the both the conventional and index linked gilt market has been intense in recent days, prompting "huge demand" for cash to support derivative structures popular amongst pension funds.

Adding to this, XPS Pensions Group chief investment officer, Simeon Willis, suggested that while the Bank of England's intervention will calm markets, "the immediate effect has been a whiplash effect with yields falling sharply in morning trading".

Willis also highlighted the recent "choppy markets" for gilts as "the most consequential event for pension schemes' investment strategies since the onset of the coronavirus pandemic".

"While most schemes with hedging in place will have either emerged relatively unscathed from this morning’s movements, some may have been caught out by missed collateral calls resulting in trimmed hedge positions in the last couple of days," he continued

"The Bank’s intervention should hopefully lead to reduced volatility going forwards but schemes should still be proactive in looking at ways to shore up their liquidity position.

"Many schemes are in a position to reduce risk in light of recent funding improvements. In particular, well-hedged schemes should be focused on maintaining their hedges, while less well hedged schemes should be looking for ways to increase it whilst the favourable pricing lasts."

Adding to this, Quilter portfolio manager, Stuart Clark, stated: "The BoE is trying to slow down all the plates spinning in the air without letting any fall and the Treasury during the “mini-budget” on Friday threw a bunch of marbles onto the floor to make it more challenging.

"By instigating targeted, controlled and (apparently) time limited intervention the BoE will try to support the economy in order to avoid a more expensive bailout if conditions continue to materially deteriorate while maintaining independence.

"Above all we need to see the government regain credibility with domestic and international investors and explain how they plan to pay for these tax cuts other than just through borrowing."

Pensions industry experts previously raised concerns that rising interest rates could prompt an increase in liability driven investment (LDI) managers flagging emergency collateral calls, with the regulator having previously warned that some schemes may be under-prepared, after "years of falling interest rates in which LDI funds were paying collateral back to schemes".

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