Putting the BoE’s Bond Sale ‘Pause’ In Perspective

One day after new Federal Reserve head Kevin Warsh completed the First Rate Hike page of the scrapbook we hope he is secretly keeping, the Bank of England (BoE) voted 6 – 3 to hold rates again, observing “little evidence so far of material second-round effects in price and wage-setting” from higher energy prices.^[i] We think this is a sensible decision, considering official data show inflation outside energy isn’t soaring and rate hikes can’t boost oil supply.^[ii] Whilst commentators we follow renewed their inflation warnings all the same, we think markets are used to this old ghost story, which leaves us to focus on something more interesting: changes to the BoE’s long-term bond sales plans. We saw some headlines wrongly call this the end of “quantitative tightening” (QT) and credited the announcement for long-term Gilt yields’ biggish Thursday drop.^[iii] Seems a little perspective is in order.

QT is the unwinding of “quantitative easing” (QE), where monetary policy institutions globally bought long-term bonds in hopes reducing long-term interest rates would help stimulate economic growth whilst short rates were stuck near zero. Whilst we think it achieved the first goal (lowering long rates), we think it ultimately missed the whole stimulate part because it flattened yield curves, which discourages lending. A yield curve graphs a single bond issuer’s rates, arrayed from short-term to long-term maturities. In fractional reserve banking systems like Britain’s, banks generally borrow at short rates and lend at long rates, which we think makes the spread a proxy for profit margins on new loans. When monetary policymakers reduced long rates whilst short rates were stuck, we think they shrank potential loan profits, which deterred banks from lending to all but the most creditworthy borrowers, which loan officer surveys suggested shut out a lot of small businesses that hoped to invest.^[iv] Meanwhile, since water always finds a way, we have seen numerous analyses demonstrating capital allocation went off balance sheet, through private equity and private credit funds, which we leave you to form your own opinions about. To us, QE was nearly 15 years of market distortions that weren’t a net benefit.

QE also left monetary policymakers with a problem: Trillions of pounds’ worth of bonds (and, in the Bank of Japan’s case, equity exchange traded funds, or ETFs) on their balance sheets.^[v] Returning these securities to private hands to return conditions to normal was always their stated goal, but it required delicate planning to avoid surprising or flooding the market. Specifics varied, but policymakers chose to run down their balance sheets gradually, by selling bonds and/or letting maturing bonds roll off at a slow, pre-set pace. The Bank of Japan, for its part, sold stocks it bought and began selling equity ETFs earlier this year at a glacial pace.

The BoE has been both selling Gilt holdings and letting some roll off, almost halving its holdings since February 2022 and letting Britain’s yield curve steepen.^[vi] No small coincidence to us, loan growth heated up bigtime this year.^[vii] But we also saw a lot of griping. Some commentators we follow blame QT for making it more expensive for the government to borrow, potentially teeing up tax hikes to fund the new government’s spending plans. Others lament the BoE selling bonds at a loss, which we have observed some politicians dwelling on lately.

Now, changes are afoot. QT is now on pause whilst HM Treasury considers a novel approach, which, if greenlit, will start in April. In this scenario, the BoE will slow its pace of bond sales to £20 billion annually, but not on the open market. Instead, it will sell “at market prices and in a pre-defined manner” to the Treasury’s Debt Management Office (DMO).^[viii] The BoE also identified £221.7 billion worth of individual bonds it will hold to maturity—letting them gradually roll off its balance sheet through 2034—plus £120 billion worth of bonds (with maturities ranging from 13 to 45 years) it will hold to maturity to back future banknote issuance.^[ix]

In his post-meeting remarks, BoE Governor Andrew Bailey stressed that recent market volatility and the upcoming Budget didn’t spur this change, and that he has been consulting with the Treasury and DMO since “well before the conflict broke out in the Middle East.”^[x] Chancellor of the Exchequer John Healey described it as “a return to a single public-sector supplier of Gilts to the market.”^[xi] From this, we infer that the DMO may choose to retire the bonds and replace them with whatever maturities it deems most beneficial, but the details are scant.

At any rate, for the next seven-ish months, it seems the BoE won’t be selling bonds. That news shaved about 8 bps (0.08 percentage point) off 10-year Gilt yields and -12.5 bps of 30-year yields Thursday, which seems like a sentiment reaction to us.^[xii] We think headlines massively overrate QT’s bond market influence. At QT’s peak, the BoE was selling £50 billion bonds per year.^[xiii] But per the DMO, the average weekly Gilt trading volume since 2025 began is about £230 billion.^[xiv] In the average week, investors trade over four times what the BoE sells in a full year. We reckon that just isn’t enough to move the needle. Reducing the pace and morphing it to a Treasury buyout probably has as little effect as the US Treasury’s recent bond buyback increase.^[xv] Or the BoJ’s tiny ETF sales, which haven’t stopped Japanese stocks from outperforming the world this year.^[xvi]

Moreover, we see no shock power here. Monetary policymakers announce the regular plan, making markets well aware of what is afoot. We find surprises move markets most, not scheduled actions.

To us, this looks like another example of investors hyper-focussing on bond market wiggles, which we find to be a typical reaction to short-term volatility. Sign of the times and all, not a fundamental sea change, in our view.