The move comes five days after the reaction to chancellor Kwasi Kwarteng’s mini Budget sent the pound into freefall and caused massive stock market losses.

Yesterday saw warnings that interest rates could rise to 6%. This has had the knock-on effect of chaos in the mortgage market as lenders withdraw mortgage products and hike interest rates.

In a statement the Bank of England said it had been monitoring developments in financial markets very closely “in light of the significant repricing of UK and global financial assets”.

The bank will also postpone the planned start of its gilt sale programme.

What are government bonds?

A government bond is a type of investment where you lend money to a government in return for an agreed rate of interest. This is paid to you at regular periods, known as the ‘coupon’.

When the bond expires your original investment amount will be returned to you. The day you get the money back is called the ‘maturity date’ – this could be anything from one year to 30 years.

Governments use bonds to raise funds that can be spent on new projects or infrastructure. UK government bonds are commonly referred to as ‘gilts’.

Government bonds from established and stable economies are generally regarded as being low-risk investments. Historically, the UK has been viewed as a stable economy.

Who invests in government bonds?

Bonds are bought by large banks or financial institutions in a bond auction. Those institutions will then sell the bonds on to pension funds, other banks, and individual investors.

Investors can invest in funds by buying actual bonds, or investing in bond exchange traded funds (ETFs) or bond funds.

A lot of pension funds invest in bonds – so your money could be invested in bonds without you realising it.

What is a bond yield?

Bond yields – or coupon yields – represent the amount of money an investor receives for owning the debt as a percentage of its current price. When the price of a bond falls, yields rise.

Bond yields have risen across several countries this year as high inflation hits global growth.

Last week’s mini Budget is seen as the main trigger for the recent surge of gilt bond yields, after the chancellor announced £45bn in unfunded tax cuts. The International Monetary Fund has warned that Kwarteng’s move will “likely increase inequality”.

Sandra Holdsworth, head of rates at Aegon Asset Management, said: “Selling in both the conventional and index-linked gilt market has been intense in recent days. This has led to a huge demand for cash to support derivative structures popular amongst pension funds. Cash has been raised by selling more gilts, the prices fall and the circle continues.”

Why has the Bank of England acted?

The Bank of England has intervened in the bond market in a bid to stabilise the UK economy. The concern was there would be a huge run on pensions, similar to the run on Northern Rock at the start of the financial crisis. The bank said it would buy government bonds on a temporary basis to help “restore orderly market conditions”.

A statement from the Bank of England said: “This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. 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 stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

What is the Bank of England going to do?

The bank said it will carry out temporary purchases of long-dated UK government bonds from today (28 September). It said the purpose of these purchases will be “to restore orderly market conditions”.

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 said these purchases will be strictly time limited and are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October.

What do the experts say?

Joshua Raymond of XTB said: “We’ve seen the Bank of England intervene in the UK Gilt market to purchase long-dated bonds in an effort to calm market volatility in UK bonds. As a result, we saw an immediate fall in long-dated UK gilt yields with the 10yr and 30yr bond yields falling by around 0.4% in a matter of minutes.

“This is a significant step by the Bank of England. The UK central bank first tried words, which failed. Now it tries to intervene in bond markets to bring yields back under control. On the one hand, this might bring some reassurance to the market that the BoE is ready to act outside of its scheduled meetings. This means it’s now much more likely we will see major interest rate hikes before the next MPC meeting in November.

“Yet on the other hand, the Bank of England is applying plasters on the financial wounds created by the Truss government who have shown no hint at reversing policy. So until that happens, the question remains how much further will the BoE be forced to intervene further and over what time period? Time will tell.”

Donald Phillips, co-head of the Liontrust Global Fixed Income Team, said: “This is a welcome piece of news in the short term, preventing for now a run on the gilt market. Ultimately, whilst inflation remains a problem, quantitative easing (QE), is unlikely to be anything other than a very short-term fix. Indeed, the bank is clear that quantitative tightening (QT) will recommence at the end of October.

“We hope this is buying the UK government time to address the flaws in their profligate fiscal policies, affording them some room to bring to parliament a plan based on the reality of the economy we have. Failure to address their fiscal plan, we believe, will likely lead to more pain in government bonds down the line.”