Investors and economists are urging the Bank of England (BoE) to slow or halt its sales of long-dated UK government bonds (gilts) amid concerns over market liquidity and rising government borrowing costs. The BoE has actively shrunk its gilts portfolio from nearly £875 billion to £688 billion, but its unique approach of actively selling bonds, rather than just waiting for them to mature, is drawing criticism. Analysts expect the BoE to continue reducing its balance sheet by £100 billion per year, including £13 billion in active gilt sales in the upcoming year, though some like JPMorgan and Deutsche Bank suggest an increased overall pace.
The central bank's current sales strategy focuses on maturities of three years or longer, leading to a "structurally scarce" market for shorter-dated bonds. Strategists like Moyeen Islam of Barclays and Mark Capleton of Bank of America recommend that the BoE start selling gilts with one to three-year maturities to improve market functionality and liquidity, as these shorter bonds comprise about £225 billion (one-third) of the BoE's portfolio. Selling these could also help the BoE shrink its balance sheet more smoothly and incur proportionally smaller losses compared to longer-dated bonds.
The debate is further fueled by the financial implications of the BoE's quantitative tightening (QT) program. The BoE has incurred substantial losses on bonds, estimated to reach £125 billion, which are immediately borne by the taxpayer. Critics argue that slowing or halting long-dated sales would reduce immediate fiscal burdens, as allowing bonds to mature would spread losses over time. Some analysts, including those from Deutsche Bank, predict the BoE might slow its overall QT pace to £50 billion and potentially cease long-dated bond sales entirely, shifting towards medium and short maturities where demand is stronger. The central bank has indicated it will reduce its gilt holdings until reserves become scarce, estimated to be between £345 billion and £490 billion.
