UK central bank sells some of its £838bn QE bonds

UK Central Bank

The UK’s central bank on Tuesday held its first auction to sell some of its £838 billion stockpile of government bonds it bought during successive quantitative easing (QE) programmes from 2009 to 2021 to help prop up the economy through the global financial crisis and the pandemic.

The Bank of England is the first central bank in the Group of Seven (G7) to actively sell QE bonds to investors.

There was solid demand as investors bid for 3.26 times the £750 million of gilts with a remaining maturity of three to seven years which the BoE put up for sale.

The BoE aims to sell £6 billion of gilts in eight auctions in November and December as part of a plan to reduce its gilt holdings by £80 billion over 12 months through a mix of sales and not reinvesting money from maturing gilts.

“This is a landmark moment as the gilt market adjusts to a future without QE,” wrote Citigroup analysts in a note.

“There remain concerns about who will buy all the gilts.”

Paul Hollingsworth, chief European economist at BNP Paribas, said: “Tightening monetary policy through the interest-rate channel is tried and tested.

“With QT (quantitative tightening), central banks are entering uncharted waters — the risks of unintended consequences are clearly higher.”

Elaine Torry, co-head of defined benefit investment at consultant Hymans Robertson, said: “It’s difficult to anticipate how the market will react to the Bank of England’s actions as the landscape of the field that investors, most notably UK defined benefit pension schemes, are operating in has changed quite dramatically since the original planned date for the sale.

“One of the big determinants of the outcome of the sale will be whether defined benefit pension schemes, who are one of the biggest holders of government bonds, are ready, willing and able to step back into the gilt market as a buyer of these gilts …

“Today’s sale of gilts from the Bank of England introduces a real risk that yields will increase once again.

“Markets and investors are still scarred from recent turmoil, and as many pension schemes seek to consolidate and review their investment strategy they could, in the short term at least, be faced with a further round of investment decisions.”