Bank of England urged to slow bond sales

The Bank of England is being urged to slow its quantitative tightening programme and halt the active sale of long-dated bonds following a significant bond market disruption that saw long-term borrowing costs reach their highest levels this century. A group of leading economists has voiced these concerns.

This week’s global sell-off in long-term debt has sent shockwaves through markets, with bond yields rising sharply due to fears over government spending control. Investors were further unsettled by Donald Trump’s ongoing criticism of the Federal Reserve and political unrest in France.

UK government bonds, known as gilts, were affected by the turmoil. The yield on 30-year bonds reached its highest point since 1998, while 10-year gilt yields rose to nine-month highs, adding pressure on Prime Minister Keir Starmer and the Chancellor’s fiscal plans.

The recent sell-off, primarily affecting long-term borrowing, has intensified scrutiny on the Bank of England’s unconventional quantitative tightening approach, which involves actively selling government debt to investors.

Richard Carter, head of fixed interest research at Quilter Cheviot, stated to City AM: “The recent spike in long-dated gilt yields is a clear signal that markets are becoming increasingly concerned about the UK’s fiscal outlook. This adds pressure on the Bank of England to reconsider the pace and structure of its quantitative tightening programme at the upcoming meeting.”

Following the financial crisis, central banks globally purchased government debt to revitalise their economies through quantitative easing (QE). Since 2022, most have sought to unwind these positions by allowing bonds to mature without replacement. However, the Bank of England has diverged by actively selling its gilt portfolio in a process termed ‘active quantitative tightening.’

Officials are set to reassess the pace of quantitative tightening for the coming year later this month. However, a prominent group of economists and analysts warns that, given this week’s market upheavals, the Bank risks causing “further disruption in the gilt market” if it does not significantly reduce the pace of its bond sales.

Matthew Aimis, rates management investment director at Aberdeen, noted: “The QT programme was designed to function quietly in the background. Gilt supply is high and will remain high for the foreseeable future, so we don’t see what the advantages are for the BoE to continue sales at this point.”

Julian Jessop, an independent economist and member of City AM’s Shadow Monetary Policy Committee, added: “There is a strong case for pausing QT completely pending a full review of the policy. I would reduce the pace of QT more aggressively than the markets expect – say to £50 billion in the coming year – while also emphasising that any active sales will be focused on shorter-dated bonds.”

Interest rates on long-term sovereign debt have been rising globally, with US 30-year Treasury yields increasing by as much as 0.864 per cent this year, mirroring trends across much of Europe.

Carter from Quilter Cheviot suggested that with waning demand for long-term bonds, the Bank should reconsider “the composition of its gilt sales.” He said, “Investors are particularly sensitive to the sale of longer-dated bonds, which have borne the brunt of recent volatility. A pause or slowdown in selling these maturities could help restore confidence and reduce the risk of further disruption in the gilt market.”

Jessop further commented that markets already anticipate a slowdown in QT pace from £100 billion to £70 billion over the next year, suggesting any reduction would need to be more substantial to impact confidence significantly.

During a Treasury Select Committee appearance, Bank of England governor Andrew Bailey stated that the future pace of tightening remains undecided. “Just to reassure you, the decision we’re going to take in the next few weeks is an open decision,” he told MPs. “Very clear, nothing closed about that decision.”