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

One day after new Fed head Kevin Warsh completed the “first rate hike” page of his scrapbook, 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] Sensible decision to us, considering inflation outside energy is indeed tame and rate hikes can’t boost oil supply. But inflation fears resurged all the same. Markets are used to this old ghost story, though, leaving us to focus on something more interesting: changes to the BoE’s long-term bond sales plans, which some headlines wrongly called the end of “quantitative tightening” (QT) and credited for long-term Gilt yields’ biggish Thursday drop. Seems a little perspective is in order.

QT is the unwinding of “quantitative easing” (QE), where central banks globally bought long-term bonds in hopes reducing long-term interest rates would help stimulate economic growth while short rates were stuck near zero. While we think it achieved the first goal (lowering long rates), it ultimately missed the whole stimulate part because it flattened yield curves, which discourages lending. Banks borrow at short rates and lend at long rates, making the spread a proxy for profit margins on new loans. When central banks reduced long rates while short rates were stuck, they shrank potential loan profits, which deterred banks from lending to all but the most creditworthy borrowers, shutting out a lot of small businesses that hoped to invest. Meanwhile, since water always finds a way, capital allocation went off balance sheet, through private equity and private credit funds, which, draw your own conclusions. To us, it was nearly 15 years of market distortions that weren’t a net benefit.

QE also left central banks with a problem: Trillions of dollars’ worth of bonds (and, in the Bank of Japan’s case, equity ETFs) on their balance sheets. Returning these securities to private hands was always the goal, but it required delicate planning to avoid surprising or flooding the market. Specifics varied, but central banks 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. No small coincidence, loan growth heated up bigtime this year. But there was also a lot of griping. Some 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 some politicians have exploited lately.

Now, changes are afoot. QT is now on pause while 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 HM Treasury’s Debt Management Office (DMO).^[ii] 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.

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.”^[iii] He said it is all about streamlining Gilt supply, making the DMO the “sole official sector supplier of government debt.”^[iv] From this, we infer that the DMO may choose to retire the bonds and replace them with whatever maturities it believes most beneficial, but the details are scant.

At any rate, for the next seven-ish months, 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.^[v] Headlines massively overrate QT’s bond market influence. At QT’s peak, the BoE was selling £50 billion bonds per year. But per the DMO, the average weekly Gilt trading volume since 2025 began is about £230 billion.^[vi] In the average week, investors trade over four times what the BoE sells in a full year. 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. Or the BoJ’s tiny ETF sales, which haven’t stopped Japanese stocks from outperforming the world this year.^[vii]

Moreover, there is no shock power here. Central banks announce the regular plan, making markets well aware of what is afoot. Surprises move markets most, not scheduled actions.

To us, this looks like another example of investors hyper-focusing on bond market wiggles, which is a typical reaction to short-term volatility. Sign of the times and all, not a fundamental sea change.