Reportedly, the Bank of England plans to pause long-term bond sales, as the most aggressive "balance sheet reducer" in the global bond storm hits the brakes

According to reports from Zhitong Finance APP, the Bank of England plans to stop selling its holdings of 20-year and 30-year long-term government bonds as part of a comprehensive overhaul of its bond sale program. The reports, citing sources, said that officials from the Bank of England, the Treasury, and the Debt Management Office (DMO), which issues government debt, have drafted related plans, but did not disclose the sources; the final decision remains in the hands of the Bank of England. It is expected that the Bank of England will officially announce this decision outside of its monetary policy announcement on Thursday.

In the turmoil of the global bond market, the most aggressive quantitative tapering central bank comes to a halt first

The background to this adjustment is that long-term government bond yields have risen to multi-decade highs. The 30-year UK gilt yield is now above 5.9%, levels unseen since the 1990s; prices for the 20-year and 30-year bonds fell last week to their lowest since 1998.

The Bank of England is the most aggressive central bank among the G7 in terms of quantitative tightening, and is the only major central bank to actively sell bonds into the market before their maturity. Since 2009, it had accumulated up to £895bn in bond holdings through quantitative easing, now reduced to around £490bn, with about £150bn in long-term bonds maturing after 20 years.

Market participants expect the Bank of England will slow its quantitative tightening pace to £50bn a year for the next 12 months starting in October—lower than £70bn over the previous two years and £100bn the year before that. This means the scale of active sales will hold at about £20bn. However, long-term bonds make up only around 20% of current active sales—so even if the same pace and structure is maintained, only about £4bn of this holding would actually be sold.

RBC BlueBay Asset Management’s Head of Market Strategy, Mike Bell, expects the Bank to shift sales to shorter maturities, stating, “It would not be surprising to see a complete stop to long-duration gilt sales.”

In fact, the Bank of England has been “applying the brakes” for some time: over the past year, it has sold only about £4bn from its more than £150bn long-term gilt holdings, mostly focused on two ultra-long bonds—at this pace, it would take more than 24 years to fully unwind. In last quarter’s auction plan, the number of over-20-year gilt auctions fell to zero—the first time since the active sales program began in January 2023.

T. Rowe Price’s Chief European Macro Strategist Tomasz Wieladek believes a market-neutral and prudent approach would mean reducing or even stopping long-duration gilt sales, as pension fund demand for these bonds has suffered a structural decline.

The “Lose Half Each Sale” Calculation

The core problem is the loss. The Bank of England was buying heavily when prices were high and is now selling at low levels—Deutsche Bank analysts estimate that the average discount rate when selling long-dated bonds as part of quantitative tightening is as high as around 50%. Economists widely agree that since 2022, rapid sales of long-duration bonds have cost UK taxpayers about £22bn; the Office for Budget Responsibility (OBR) estimates the total cost of fully unwinding this portfolio over the next five years could reach about £100bn.

After stopping sales of long-dated bonds, the Bank of England will continue its active sales (about £20bn/year) but will completely divest from long-term debt; at the same time, it will directly sell medium- and short-term gilts to the Treasury’s DMO to help smooth the supply pressure of extra government debt. This “New Zealand model” has been under discussion since 2022 but was shelved out of concern it might undermine the independence of monetary policy. Compared to maintaining the current sale pace, stopping long-term gilt sales is expected to save the Treasury directly about £2.5bn a year by the end of this decade—providing valuable room for maneuver for the new Chancellor of the Exchequer John Healey, ahead of his first budget statement on October 28th.

But the flip side is just as clear: halting the sale of loss-making bonds means the Bank will retain more reserves, and the Treasury will have to pay more interest, making it harder for Healey to meet his fiscal rule of “balancing day-to-day spending.” Bank of England Governor Andrew Bailey has repeatedly defended the previous sales strategy, insisting that to immediately halt sales would merely spread the inevitable losses over a longer period.

Thursday’s Decision: Standing Pat on Rates, and Split Votes

The market is focusing on this week’s Monetary Policy Committee (MPC) meeting on Thursday. The market widely expects the Bank of England to keep rates unchanged (currently about 3.75%)—previously, Bailey refuted talk that further hikes are “inevitable” during his parliamentary testimony last week. But the committee is likely to see divided votes, with investors closely watching the number of dissenters. UK data is also dense this week: August inflation data will be released on Wednesday, and Tuesday’s employment figures were mixed—the three-month ILO unemployment rate to July held steady at 4.9% (expected to rise to 5%), but claimants of unemployment benefits increased by 27,800—more than triple expectations.

The specter of rate hikes has not faded. Boosted by Iran tensions pushing up oil prices, UK petrol and diesel prices are at their highest since 2022, and the market is currently betting heavily that the Bank of England will raise interest rates four times next year. On Monday, Goldman Sachs shifted its forecast to more hawkish, expecting a 25 basis point hike in November; Citi joined the hawkish camp on the same day. UBS expects Thursday to be a “hawkish hold.”