A group of leading economists has suggested that the Bank of England should decelerate its quantitative tightening programme and halt active sales of long-dated bonds entirely, following this week’s bond market turmoil which saw the cost of long-term borrowing skyrocket to its highest level this century.
Global markets were shaken by a widespread sell-off in long-end debt on Monday and Tuesday, with bond yields sharply rising due to concerns that governments will struggle to control spending. Investors’ worries were further exacerbated by Donald Trump’s ongoing attack on the Federal Reserve and political instability in France, as reported by City AM.
Long-dated gilts – the term for UK government bonds – were also caught up in the chaos. The yield on 30-year bonds surged to its highest level since 1998 and 10-year gilt yields rose to nine-month highs, adding more pressure on Prime Minister Keir Starmer and his Chancellor’s spending plans.
Will the Bank of England shift gear later this month?
The question now is whether the Bank of England will change its strategy later this month.
However, the sell-off, which was primarily confined to long-term borrowing, will also increase scrutiny on the Bank of England’s unconventional approach to quantitative tightening, which involves actively selling government debt to investors.
“The recent spike in long-dated gilt yields is a clear signal that markets are becoming increasingly concerned about the UK’s fiscal outlook,” Richard Carter, head of fixed interest research at Quilter Cheviot, told City AM. “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, leading central banks worldwide purchased government debt to stimulate their battered economies through a mechanism called quantitative easing (QE).
From 2022 onwards, most have attempted to reverse this process by allowing their bond holdings to mature without replacement.
However, the Bank of England has stood apart internationally, actively disposing of its gilt portfolio back into the bond market through a strategy termed ‘active quantitative tightening’.
Policymakers will review the QT pace for the coming year later this month, but a prominent group of economists and analysts have contended that following this week’s turbulence, the Bank risked triggering “further disruption in the gilt market” without substantially reducing its bond disposal rate.
“The QT programme was designed to function quietly in the background,” said Matthew Aimis, rates management investment director at Aberdeen. “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.
“There is a strong case for pausing QT completely pending a full review of the policy,” added Julian Jessop, an independent economist and member of City AM’s Shadow Monetary Policy Committee.
“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.”
Officials should ‘pause’ long-dated gilt sales
Even prior to this week’s market turmoil, borrowing costs on long-term government debt have been climbing globally.
Across the Atlantic, 30-year Treasury yields have surged by as much as 0.864 per cent this year, with comparable shifts occurring across European bond markets.
Quilter Cheviot’s Carter suggested that with appetite for long-term bonds evaporating, the Bank should carefully consider “the composition of its gilt sales.”
“Investors are particularly sensitive to the sale of longer-dated bonds, which have borne the brunt of recent volatility,” he said. “A pause or slowdown in selling these maturities could help restore confidence and reduce the risk of further disruption in the gilt market.”
Jessop noted that markets were already anticipating policymakers would decelerate the QT programme from £100bn to £70bn over the coming year, suggesting any reduction would need to be more substantial if the Bank wished to achieve “a significant impact on confidence”.
However, during his appearance before the Treasury Select Committee on Wednesday, Bank of England governor Andrew Bailey indicated that the future pace of tightening remained 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.”
