The Bank of England (BoE) has announced a multi-year program to offload the majority of its remaining £488 billion in government bonds, aiming for completion by September 2034. This quantitative tightening (QT) strategy will involve a combination of passive redemptions and active sales. Notably, the BoE will pause active sales for the next six months and completely cease sales of long-dated gilts.
This decision comes after British 30-year borrowing costs reached their highest level since 1998, part of a broader global bond sell-off. The BoE's previous bond sale policy had drawn criticism for crystallizing losses, which are ultimately underwritten by the government. Governor Andrew Bailey has emphasized the central bank's desire to reduce interest-rate risk on its balance sheet, a risk heightened by holding long-dated gilts.
Under the new plan, the BoE will conduct active sales of £20 billion annually of gilts maturing between 2035 and 2049, totaling £146 billion. The remaining £120 billion of even longer-dated gilts will be transferred into a new portfolio within the existing Asset Purchase Facility, serving as a way to manage bonds that would be difficult to sell or take a very long time to mature passively. Economist Sanjay Raja at Deutsche Bank described this as effectively a duration swap.
Investors reacted positively to the announcement, with British government bonds rallying sharply on Thursday, particularly longer-dated securities. The 30-year bond yield was on track for its biggest daily fall since May, dropping by 12 basis points to 5.74%, after having touched 5.96% earlier in the week. The BoE's move to pause and eventually abolish long-end gilt sales was seen as easing pressure on the gilt market, which some commentators had blamed for exacerbating recent yield increases.
Instead of seeking private-sector buyers for all its gilts, the BoE plans to sell some directly to the Treasury. The Treasury's Debt Management Office (DMO) will then issue new bonds to cover the costs, allowing the DMO to tailor gilt sales to market demand, which currently favors shorter-dated maturities. Chancellor John Healey stated this approach simplifies the process and returns to a single public-sector supplier of gilts to the market.
