MercoPress. South Atlantic News Agency

Bank of England begins QE “tightening”; first successful sale of £750 million bonds

BoE aims to sell £6 billion of gilts across eight auctions in November and December, as part of a plan to reduce its gilt holdings by £ 80 billion pounds over 12 months

The Bank of England sold on Tuesday £750 million worth of UK government bonds from its quantitative easing stockpile. It was the first Western central bank to do so and received a solid demand from investors at its first auction to sell government bonds from its £838 billion pound quantitative easing portfolio.

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

Britain’s central bank is the first among major economies to start outright sales of government bonds - in part because of the long average maturity of its holdings, compared to those held by central banks in the United States and Canada.

There was little immediate market reaction to the auction result. Benchmark five-year gilt yields held broadly steady at 3.56%, 4 basis points down on the day and little changed from their level before the auction.

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. This is a bid to cover ratio of 3.26, considered very positive.

During standard British government bond auctions held by the United Kingdom Debt Management Office, investors typically bid for just over twice the volume of gilts available. These auctions normally are for larger volumes of gilts than the BoE is selling at its auctions.

The central bank said it received £2.44 billion of bids for the various short-maturity gilts it put up for sale, a bid-to-cover ratio of 3.26.

The move is aimed at reversing the QE program that helped prop up the economy through the global financial crisis and the pandemic. Under the program, the Bank of England bought bonds in financial markets to push interest rates to near zero, hoping that easier money would give investors confidence and help foster growth.

While QE kept a lid on market interest rates, Governor Andrew Bailey hopes that its reverse, dubbed quantitative tightening, can run in the background and leave the focus on the BOE’s benchmark lending rate as the main tool of managing monetary policy.

The BoE started paring back its government bond holdings in February when it agreed to allow maturing debt to roll off the balance sheet instead of being replaced. While the US Federal Reserve is doing the same, it hasn’t pursued active sales yet.

The experiment comes at a delicate moment for the Treasury and BoE. Once BoE’s planned sales are added to the government’s financing needs, investors will have to absorb the largest supply of UK bonds in history, according to the nation’s debt chief.