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\t\tThe Bank of England\u2019s Andrew Bailey will be closely monitoring movements in long-dated bonds \t<\/p>\n
The Bank of England should slow its quantitative tightening programme and stop active sales of long-dated bonds entirely in the wake of this week\u2019s bond rout that saw the cost of long-term borrowing soar to its highest level this century, a group of top economists has said.<\/p>\n
Markets were rocked by a global sell-off in long-end debt on Monday and Tuesday, which saw bond yields climb sharply on fears that governments will struggle to rein in spending. Investors were further troubled by Donald Trump\u2019s protracted assault on the Federal Reserve and political instability in France.<\/p>\n
Long-dated gilts \u2013 the name given to UK government bonds \u2013 were swept up in the tumult<\/a>. The yield on 30-year bonds jumped to its highest level since 1998 and 10-year gilt yields climbed to nine-month highs, piling fresh on Prime Minister Keir Starmer and his Chancellor\u2019s spending plans.<\/p>\n Will the Bank of England shift gear later this month?<\/p>\n But the sell-off, which was mostly restricted to long-term borrowing, will also add further scrutiny on the Bank of England\u2019s unusual approach to quantitative tightening<\/a> that has seen it actively sell government debt to investors.<\/p>\n \u201cThe recent spike in long-dated gilt yields is a clear signal that markets are becoming increasingly concerned about the UK\u2019s fiscal outlook,\u201d Richard Carter, head of fixed interest research at Quilter Cheviot, told City AM. \u201cThis adds pressure on the Bank of England to reconsider the pace and structure of its quantitative tightening programme at the upcoming meeting.\u201d<\/p>\n In the aftermath of the financial crisis, major central banks across the world bought up government debt in a bid to kick-start their shell-shocked economies via a process known as quantitative easing (QE). <\/p>\n Since 2022, most have sought to unwind that cycle by letting their bond holdings mature without replenishing them. But the Bank of England has been an international outlier, actively selling its portfolio of gilts back into the bond market in a programme dubbed \u2018active quantitative tightening\u2019.<\/p>\n Officials will reassess the pace of QT<\/a> for the following year later this month but an influential group of economists and analysts have argued that after this week\u2019s convulsions, the Bank risked sparking \u201cfurther disruption in the gilt market\u201d if it did not dramatically slow the pace of its bond sales.<\/p>\n \t\t\t\t\tRead more<\/p>\n \t\t\tThe worrying bond market trend no one is talking about<\/a><\/p>\n \u201cThe QT programme was designed to function quietly in the background,\u201d said Matthew Aimis, rates management investment director at Aberdeen. \u201cGilt supply is high and will remain high for the foreseeable future, so we don\u2019t see what the advantages are for the BoE to continue sales at this point.\u201d<\/p>\n \u201cThere is a strong case for pausing QT completely pending a full review of the policy,\u201d added Julian Jessop, an independent economist and member of City AM\u2019s Shadow Monetary Policy Committee<\/a>. \u201cI would reduce the pace of QT more aggressively than the markets expect \u2013 say to \u00a350 billion in the coming year \u2013 while also emphasising that any active sales will be focused on shorter-dated bonds.\u201d<\/p>\n Officials should \u2018pause\u2019 long-dated gilt sales<\/p>\n Even before this week\u2019s sell-off, interest rates on long-term sovereign debt have has been rising across the world<\/a>. In the US, 30-year Treasury yields have risen by as much as 0.864 per cent so far this year, with similar movements taking place on bonds across much of Europe.<\/p>\n Quilter Cheviot\u2019s Carter added that with demand for long-term bonds drying up, the Bank should think carefully about \u201cthe composition of its gilt sales\u201d.<\/p>\n \u201cInvestors are particularly sensitive to the sale of longer-dated bonds, which have borne the brunt of recent volatility,\u201d he said. \u201cA pause or slowdown in selling these maturities could help restore confidence and reduce the risk of further disruption in the gilt market.\u201d<\/p>\n Jessop added that markets were already expecting policymakers to slow the pace of QT from \u00a3100bn to \u00a370bn over the next year, meaning any reduction would have to larger if the Bank wanted to have \u201ca significant impact on confidence\u201d.<\/p>\n But speaking at a Treasury Select Committee appearance on Wednesday<\/a>, Bank of England governor Andrew Bailey said the future pace of tightening had not been decided. <\/p>\n \u201cJust to reassure you, the decision we\u2019re going to take in the next few weeks is an open decision,\u201d he told MP<\/a>s. \u201cVery clear, nothing closed about that decision.\u201d<\/p>\n \t\t\t\t\tRead more<\/p>\n