BOE to start asset sales in two weeks, exclude long-dated debt
THE Bank of England (BOE) will start its delayed bond sales early next month, but will initially exclude the long-dated debt at the heart of recent market turmoil following the government’s ill-fated fiscal plans.
The announcement of so-called quantitative tightening (QT) is a statement of intent from the central bank, which had been on the defensive for weeks after fallout from massive unfunded tax cuts forced it to start buying gilts again in order to avert a fire sale by pension funds.
The market chaos was a major distraction, with the central bank trying to focus on monetary tightening to tame inflation that stands near a four-decade high. It’s raised interest rates multiple times this year and has stopped reinvesting proceeds from maturing bonds in its portfolios.
Starting so-called QT is the next stage for governor Andrew Bailey, and puts the inflation fight back at the centre of the bank.
But Bailey isn’t entirely ignoring his financial stability responsibilities. The new sales plan is a pragmatic compromise, allowing him to stick to a plan to unwind a mammoth balance sheet without risking the stability he’s brought to the longer end of the market with the recent round of emergency purchases.
“This is still a punchy plan under current market conditions,” said Krishna Guha, head of central bank strategy at Evercore ISI. “The bank sees pressing ahead with substantial QT as essential to uphold its independence and credibility amid the UK’s fiscal misadventures.”
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The BOE started intervening in late September when a surge in bond yields after the fiscal announcement threatened to cause disruption at some pension funds, with potential fallout across the UK financial system.
The pound has also been on a rollercoaster in recent weeks, at one point dropping to a record low against the dollar, though it’s since recovered ground. And the tax plans cost Kwasi Kwarteng his job as chancellor of the exchequer, ousted by Truss after just 38 days.
With a new chancellor, Jeremy Hunt, now in place and a new fiscal policy focused on ensuring public debt declines in the medium term, Bailey is signalling that his efforts to shrink the central bank’s balance sheet are back on track.
New timetable
The BOE currently holds about £840 billion (S$1.35 trillion) of government bonds, built up as part of stimulus measures during economic slumps. Its most recent purchases were during the recession sparked by the Covid pandemic.
Sales were initially due to begin on Oct 3 but were delayed to Oct 31 during the market disruption. The BOE is now pushing the start back by one more day to avoid a clash with the announcement of the government’s revamped fiscal programme.
When it announced QT, the BOE said it planned to reduce its balance sheet by around £80 billion a year through active sales and redemptions, a pace that implied around £10 billion of selling per quarter.
According to the BOE’s announcement, bond sales this quarter will now be distributed evenly across the short and medium maturity sectors only. It expects to conduct sales at a similar size and frequency as had been previously announced. Any shortfall as a result of the earlier delay will be incorporated into subsequent quarters.
It will announce the dates and sizes of the auctions on Oct 20.
The move is a sign of confidence from a central banker who was widely criticised when he gave investors an ultimatum last week to clean up their portfolios by Friday when his backstop would end. Bailey’s gambit was vindicated by the surge in bond sales in the final days of the programme and the rally in UK assets as Hunt’s predecessor, Kwarteng, was pushed aside and his tax-cutting plans abandoned.
The yield on 30-year gilts closed Tuesday at 4.31 per cent, almost a percentage point lower than its peak before the BOE’s emergency intervention last month.
With the BOE still signalling concerns about market volatility, there was speculation that Bailey would delay bond sales. Expectations were further fuelled when the Financial Times reported Tuesday that a postponement had been decided. The bank issued a statement saying that the article was inaccurate, hours before announcing the sale.
The BOE still gave itself scope to halt sales if there’s fresh turbulence, saying it “will continue to monitor market conditions closely, and where appropriate factor that into the design of its sales operations”. BLOOMBERG
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