BoE to start selling bonds on Nov. 1, but not longer-dated gilts

By Andy Bruce and William Schomberg

LONDON -The Bank of England said it would start selling some of its huge stock of British government bonds from Nov. 1 but would not sell this year any longer-duration gilts that have been in the eye of a recent storm in the British government bond market.

The BoE said it was delaying its start date for the launch of its so-called quantitative tightening programme by a day from its previous schedule to avoid clashing with a government fiscal statement on Oct. 31.

The central bank wants to reduce its 838 billion pounds ($948 billion) of government bonds acquired over more than a decade of crisis-fighting, from the global financial crisis to the coronavirus pandemic and its aftermath.

The BoE said sales in 2022 would be in short- and medium-maturity sectors, not bonds of more than 20 years. They suffered the biggest sell-offs in the recent market upheaval caused by the government’s now-abandoned tax-cutting mini-budget.

Last month, the BoE sought to stop the bond market rout from damaging pension funds by starting an emergency round of buying long-dated debt, delaying its “quantitative tightening” (QT) sales by almost a month.

Those purchases ended on Friday last week.

Analysts at consultancy Evercore said the plan looked “punchy” given the still volatile market conditions.

“We assess that the Bank sees pressing ahead with substantial QT as essential to uphold its independence and credibility amid the UK’s fiscal misadventures,” they said.

BoE officials have stressed their bond-buying is not aimed at underwriting the increased borrowing of the British government in recent years.

The central bank confirmed on Tuesday that it would start the tightening scheme in a statement after markets closed.

“The maturity split of gilt sales for subsequent quarters will be considered ahead of Q1 2023,” it said.

Earlier the central bank described as inaccurate a report in the Financial Times which said top officials at the BoE had decided that a delay to QT was likely to be needed after judging the gilts market to be “very distressed” in recent weeks.

British government bonds – or gilts – suffered historic losses after the Sept. 23 publication of Prime Minister Liz Truss’ new economic growth plan.

Gilts have recouped some of their losses following a major U-turn announced by new finance minister Jeremy Hunt on Monday.

“The Bank will continue to monitor market conditions closely, and where appropriate factor that into the design of its sales operations,” the BoE statement said.

BoE Deputy Governor Jon Cunliffe said on Tuesday financial markets could remain volatile in the coming weeks but the risk of another gilts “fire sale” had been significantly reduced.

The central bank has previously said there would be a “high bar” for any delays to its sales plans.

“There’s not a huge amount of sales to come this quarter, which could support their view that sales go ahead but perhaps it’s a bit early to be sure,” said Chris Scicluna, head of economic research at Daiwa Capital Markets, London.

BoE Governor Andrew Bailey said on Saturday that the central bank was not using its stock of bonds as an active tool of monetary policy at present and its benchmark Bank Rate remained its primary instrument of policy.

($1 = 0.8842 pounds)