"In response, they sold bonds, with the yield of the 10-year UK gilt jumping from 3.3 per cent to about 3.5 per cent following the announcement."
The flattened curve showed the Bank had a "credibility problem", said James Athey, investment director at Abrdn.
He said: "The decision today was unequivocally dovish and yet short-dated yields are higher and the curve is flatter. The market is basically telling the Bank that its current stance is wrong and in the coming months it will be forced into a more hawkish stance."
He added interpreting what this meant for the wider bond market was difficult. "High inflation, a not-so-hawkish central bank, plummeting sterling, a potentially huge fiscal boost and the imminent selling of gilts by the Bank should all mean higher yields and a steeper curve," he said.
"However the market continues to price the tightening they expect, not what the BoE is forecasting, and this is naturally weighing on future growth expectations, which is pushing long end yields lower.
"If the BoE would just grasp the nettle there would be real value in the gilt market. Until they do its very difficult to want to step in."
His colleague Luke Bartholomew, senior economist at Abrdn, said the fact the hike was smaller than expected might give some relief to fixed income investors.
However, he added: "We still think the Bank has a lot of hiking left to do. And the decision to start selling the Bank’s gilt holdings at the same time that the government is likely to announce a large new issuance of gilts to finance its fiscal easing will probably keep gilts under selling pressure."
All eyes are now on Liz Truss's government's mini budget tomorrow (September 23), when it is expected to announce further tax cuts on top of its £150bn energy price guarantee.
A reversal of Boris Johnsons's government's 1.25 percentage point National Insurance hike has already been announced.
Jeremy Batstone-Carr, European strategist at Raymond James, said if the government’s plans work, sterling might stage a revival on the foreign exchanges, encouraging interest from overseas.
However, if the chancellor’s increase in extra borrowing fails to generate growth, the entire gilt-edged curve could rise yet further as confidence in the economic recovery plan diminishes.
"This potential outcome, combined with the possibility that the Bank’s quantitative tightening programme also adds to the flow of gilt-edged back onto the market, should serve as a warning to those looking for opportunities to proceed with caution," he warned.
