Asset managers whose companies oversee more than $1.5 trillion are urging the Bank of England (BoE) to scrap bond sales they believe place unnecessary strain on Britain’s government debt, while they also rack up tens of billions of pounds of taxpayer costs.
Reuters spoke to investors who had wanted the central bank to halt the sales before it pledged on September 18 to slow its overall runoff, which includes bonds that mature. They don’t think the BoE has gone far enough and recommend changing the policy, including a complete halt to sales.
As finance minister Rachel Reeves’ annual budget looms in November, Britain’s long-term borrowing costs are the highest among G7 advanced economies.
Sticky inflation and fiscal worries are depressing the value of bonds, known as gilts, while the BoE is also actively selling its holdings into weak UK debt markets, recording losses.
Yesterday, 30-year gilt yields were up around 3.5 basis points (bps) to 5.5 per cent and 10-year yields rose by around the same amount to 4.73pc as traders sold the debt.
The Treasury compensates the central bank for bond-market losses. While taxpayers previously benefited from gains on the bonds, the arrangement now costs the government £22 billion ($29.6bn) annually, research by former BoE economist Carsten Jung shows.
“Many investors including ourselves have been saying to the Bank of England you’re making the problem worse, not better. Stop doing this,” said RBC BlueBay Asset Management fixed income CIO Mark Dowding, who directly oversees assets of about $154bn. He said he doesn’t own gilts and is betting on the pound weakening against the euro.
Dowding had shared his view with BoE officials before the central bank announced it would reduce the pace of the gilt runoff to £70bn ($94bn) from £100bn annually. He’s still expecting gilt market instability and has since suggested to the UK debt office to stop issuing long-dated bonds to raise funds.
The BoE hoovered up £875bn worth of government bonds between 2009 and 2021 to support the UK economy and then moved to offload them faster than other major central banks. This so-called quantitative tightening followed years of easing by central banks in the aftermath of the global financial crisis and the pandemic.
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