How did the mini-budget affect UK gilt markets and what measures did the BoE take to stabilize them?
Executive summary
The mini‑budget era and subsequent Autumn Budget created sharp moves in UK gilt yields: long‑dated gilt yields rose substantially (30‑year up ~100bp over a year to ~5.5%) and markets repeatedly flagged elevated borrowing costs and term premia [1]. The Bank of England responded with temporary, targeted interventions — including gilt purchases and the creation of contingency facilities and discussion papers to shore up gilt‑repo resilience — to restore orderly market functioning [2] [3] [4] [5].
1. Gilt markets reacted to credibility doubts — higher yields and disrupted liquidity
Market participants treated periods of fiscal surprise or perceived weak credibility as a direct shock to gilts: long‑dated yields climbed (30‑year yields roughly 100 basis points year‑on‑year to ~5.5%), bid‑ask spreads widened and intermediation frayed when selling pressures intensified [1] [6] [7]. Analysts and fund managers warned that increased issuance and doubts about policy delivery raised the term premium and left gilts trading at a premium versus peers [8] [9].
2. The “mini‑budget” legacy: why gilts were vulnerable
The 2022 mini‑budget episode and follow‑on fiscal uncertainty left structural scars: large issuance, a renewed focus on bond‑market discipline and fragile LDI (liability‑driven investment) mechanics meant gilt markets were more sensitive to fiscal missteps and global yield moves [6] [10] [1]. Commentators and investors repeatedly warned that looser fiscal plans or backloaded savings would keep yields elevated and risk further bouts of volatility [11] [12].
3. The Bank’s emergency toolkit: temporary gilt purchases and operational interventions
When market functioning deteriorated sharply in Autumn 2022, the Bank implemented temporary and targeted gilt purchases to stop a fire‑sale spiral and restore liquidity, explicitly citing the need to reduce contagion risk to credit conditions for households and businesses [3] [2]. Those operations were described as time‑limited backstops and later unwound via a demand‑led approach to avoid disrupting monetary policy [13] [2].
4. New contingencies and facilities: preparing for future ructions
Beyond outright purchases, the Bank developed and published tools to help non‑bank financial institutions manage gilt market stress. It unveiled the Contingent Non‑Bank Financial Institution Repo facility — allowing eligible firms to borrow cash against gilt collateral in severe turbulence — and opened applications to strengthen access to liquidity in stressed repo conditions [4] [2].
5. Structural reform agenda: strengthen the gilt‑repo plumbing
Recognising that repo market frictions amplify gilt price moves, the BoE launched a public discussion on enhancing gilt‑repo resilience, proposing two main levers: greater central clearing of gilt repo transactions and minimum haircuts (margins) on non‑centrally cleared repos [5] [14]. Officials argue these reforms could reduce counterparty and liquidity risk, though they acknowledge possible trade‑offs with trading costs and market liquidity [15] [16].
6. How markets read the Budget after the mini‑budget era: relief but caution
When more credible budgets or clearer fiscal plans arrived, gilts rallied and yields fell — banks and asset managers reported renewed appetite, with 10‑year yields moving down and clients returning to gilt exposure — but several economists warned that gains might be fragile if forecasts were optimistic or if longer‑term fiscal risks remained [11] [17] [18]. Some houses still expect yields to remain elevated versus historical norms until credibility is cemented [19] [20].
7. Two competing narratives in the reporting
One strand frames recent gilt volatility as chiefly a technical/market‑structure problem — exacerbated by LDI dynamics, leveraged hedge‑fund repo positions and reduced dealer intermediation — solvable by BoE operations and repo reforms [21] [2]. Another stresses that underlying fiscal choices and elevated issuance remain the root causes and that only credible, deliverable fiscal consolidation will fully normalise term premia [9] [1].
8. Limitations and what reporting does not say
Available sources document BoE interventions, the repo reform proposals and market reactions, but they do not provide a single consensus projection for future gilt yields tied specifically to the mini‑budget’s legacy beyond individual forecasts (available sources do not mention a definitive future path for yields tied solely to the mini‑budget). Nor do they settle whether central clearing or minimum haircuts will be chosen or precisely how they will be calibrated [5] [15].
Bottom line: gilt stress after the mini‑budget reflected both fiscal credibility concerns and fragile market plumbing; the Bank of England used temporary gilt purchases, liquidity facilities and a policy reform agenda (contingent repos, discussion of central clearing/haircuts) to stabilise markets and reduce the risk of future breakdowns [2] [3] [5] [4].