Why the BoE may stop selling long gilts as Britain’s bond stress deepens

The Bank of England may stop selling some of its longest-dated government bonds as policymakers rethink quantitative tightening after a renewed surge in UK borrowing costs.

The Telegraph reported on Tuesday that the central bank is preparing to stop sales of 20- and 30-year gilts, with an announcement expected alongside Thursday’s monetary policy decision.

The move would deepen a shift already under way, rather than mark a sudden reversal of the Bank’s balance-sheet strategy.

The BoE has already scheduled no sales of gilts with maturities beyond 20 years during the current quarter, after progressively reducing its exposure to that part of the market.

Its gilt portfolio is expected to fall to about £488 billion by the end of September, from a peak of £895 billion in 2022.

Long gilts have become the pressure point

The rethink comes after an unusually painful period for long-dated UK debt.

Britain sold £4.25 billion of 30-year gilts last week at a yield of 5.8168%, the highest borrowing cost on such a syndicated sale since the Debt Management Office was created in 1998.

Thirty-year market yields have also approached 6% during the latest global bond sell-off.

Demand has not disappeared, the latest sale attracted more than £87 billion of orders, but the investor base has changed.

Defined-benefit pension schemes, once natural buyers of long gilts, have reduced their appetite as their liabilities mature.

Fund managers at Allianz Global Investors and RBC BlueBay told the Financial Times earlier this year that continued long-dated sales were becoming harder to justify as structural demand weakened.

Has quantitative tightening gone too far?

That is harder to answer than the recent sell-off suggests.

The BoE estimates that cumulative QT has added roughly 20 to 30 basis points to 10-year gilt yields since the programme began.

Its own analysis still describes the effect as modest relative to the much larger rise caused by changing rate expectations, global bond supply and higher term premiums.

Other estimates are less benign. Financial Times analysis has highlighted research suggesting QT may have increased UK borrowing costs by as much as 0.7 percentage points.

University of Liverpool professor Costas Milas argued that continuing aggressive QT while global yields are already climbing would be increasingly difficult to defend.

Slower QT would not mean easier monetary policy

Stopping long-gilt sales would therefore be better viewed as a change in implementation than a pivot towards monetary easing.

Markets expect the BoE to slow the overall pace of balance-sheet reduction, potentially to around £50 billion over the next year from £70 billion currently.

Bank Rate, meanwhile, remains the central tool for controlling inflation.

That distinction matters with oil above $100 and UK inflation risks rising again.

The BoE could keep policy restrictive through interest rates while avoiding unnecessary pressure on the weakest part of the gilt curve.

If Thursday confirms that approach, the message may be that quantitative tightening itself has not gone too far, but selling long gilts into a structurally thinner market perhaps has.