Key facts
- The Bank of England will sell government bonds directly to the Treasury instead of the open market.
- The Treasury's Debt Management Office will then issue new bonds to cover the costs of those bought from the Bank.
- This change aims to tailor gilt sales to market demand, which currently favors shorter-dated bonds.
- The yield on 30-year gilts dropped sharply to 5.745% following the announcement.
- The Bank plans to sell £146 billion of gilts back to the government by 2034, at a pace of £20 billion annually.
- The Treasury may finance its borrowing more cheaply due to the reduced supply of long-dated gilts.
The Bank of England has announced a significant shift in its quantitative tightening (QT) program, opting to sell government bonds, known as gilts, directly to the Treasury instead of the open market. This decision, made alongside holding interest rates at 3.75%, aims to simplify the process of unwinding the massive bond stockpile accumulated during quantitative easing (QE) and is expected to reduce the government's borrowing costs.
Previously, the Bank sold gilts to private-sector buyers. However, this process has been criticized for potentially crystallizing losses for the Treasury and depressing bond prices, thereby increasing yields. The new model allows the Treasury's Debt Management Office (DMO) to tailor gilt sales to market demand, which currently favors shorter-dated bonds over the longer-dated ones the Bank still holds. The yield on 30-year gilts dropped sharply to 5.745% following the announcement, its biggest fall since 2020.
The Bank's stockpile of gilts has already been reduced from a peak of £895 billion in February 2022 to £488 billion. This year, £70 billion has been run down, including £20 billion in actual sales and £50 billion reaching maturity. The Bank plans to sell £20 billion of government bonds annually alongside retiring maturing gilts, totaling an estimated £146 billion by 2034 if the plan receives final approval from Chancellor John Healey in April. Analysts at Jefferies suggest these changes imply a materially lower future supply burden, particularly for long-dated gilts, and will slow the crystallization of losses borne by the Treasury.