By Geoffrey Smith
Investing.com -- U.K. government bonds rallied sharply on Wednesday after the Bank of England dropped its plans to tighten monetary policy further by selling bonds from the portfolio it built during years of 'quantitative easing'.
By 09:35 ET (13:35 GMT), the yield on the 10-year benchmark Gilt had fallen back to 4.07%, having hit a high of 4.63% earlier in the day as markets reacted with dismay to the International Monetary Fund's criticisms of the new government's borrowing plans.
U.K. government borrowing is set to rise from its baseline by over 60 billion pounds over the next six months alone, thanks to a suite of tax cuts and energy subsidies that were the first policies to be announced last week by Prime Minister Liz Truss and her Chancellor of the Exchequer, Kwasi Kwarteng.
The Bank of England said in a statement it will intervene to restore order in a Gilt market that was rapidly spiraling out of control.
"The purpose of these purchases will be to restore orderly market conditions," the Bank said. "The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury."
The Bank had planned to sell a net 10 billion pounds in the final quarter of the year as part of its broader tightening of monetary policy to rein in inflation that was running at 9.9% in August.
Its reversion to a stance that is tantamount to quantitative easing had a negative effect on the pound, however. Having risen as high as $1.0731 earlier in the day, by 09:35 ET (13:35 GMT), it was back down at $1.0644, down 0.8% on the day.
Earlier, Sky News had quoted unnamed sources as saying that Kwarteng had pleaded with London financiers in a meeting that they refrain from speculating against the pound.