BOE Gilt Sales Drive 70bp Yield Increase

Mizuho estimates the Bank of England's bond sales added 70 basis points to 30-year yields. The central bank’s Quantitative Tightening program is the primary driver of recent gilt market volatility. Traders are focused on the pace of balance sheet runoff rather than interest rate decisions.

A recent report suggested the BOE may stop selling long-dated bonds. Any reduction in supply would support bond prices. The key debate centers on how far the central bank is willing to reduce its active sales.

QT pressure hits long-end yields

The BOE is unwinding its pandemic-era gilt purchases. These sales have increased UK long-term borrowing costs to levels last seen in 1998. Morgan Stanley analysts note that heavy issuance and shrinking central bank holdings have hit longer maturities hardest.

Pension fund demand has faded, leaving the market more exposed to supply shocks. Sales of long-dated gilts are occurring below the BOE's original purchase prices. This dynamic is costing the government billions in losses.

Market expectations for supply reduction

A recent BOE survey shows the median view expects balance sheet runoff to slow to £50 billion in the year starting October. This implies roughly £20 billion in active gilt sales. Some participants expect a shift to passive-only sales, while others anticipate the current approach will continue.

Since February 2022, the BOE has cut its holdings to £489 billion. This is down from nearly twice that amount. The central bank intends to sell the entire stock while maintaining market functioning and predictability.

External risks and independence concerns

External shocks could limit the impact of any QT changes. The Middle East conflict is lifting oil prices and stoking inflation concerns. These factors may dampen the positive effect of reduced gilt supply.

Citigroup analysts caution that tailoring sales to fiscal needs could raise doubts about BOE independence. Jamie Searle suggests the bank will likely maintain the status quo to avoid blurring monetary policy control. This stance prioritizes institutional credibility over short-term fiscal relief.