The Bank of England is rushing to sell its gilts. For investors, this could be an opportunity.
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The Bank of England is rushing to sell its gilts. For investors, this could be an opportunity.

More than any other central bank, the Bank of England (BoE) is in a hurry to reduce its balance sheet, running up huge losses for the taxpayer. Is this another “selling gold at the bottom” moment?

Move over QE or Quantitative Easing. Quantitative Tightening (QT) is the order of the day.  Money printing is in reverse and balance sheet reduction – selling the government bonds bought during the QE era – is now a focus of central banks. Just like QE before it, the precise terms of these sales are watched keenly by the market, with knock on implications for borrowing costs for governments, corporates and households alike.

Other central banks are treading gently. Selling bonds on this scale has never been done before. Nor has it been tried when bond markets have had to digest the ramifications of both high inflation and substantial rate hikes. Prices for bonds are today much lower (and yields higher) than when the central banks bought the same securities previously. So understandably, central banks are cautious in trying to sell those bonds back to the market and proceeding slowly.

But not so the Bank of England.

Of all the central banks, the Bank of England has been the most aggressive in terms of selling the bonds it bought during the QE era. The process itself involves the Bank of England both allowing bond holdings to mature without replacing them, and also selling its bond holdings into the market. This is not unusual. But what is unusual is the pace and scale of these activities.

Adjusting for the sizes of the different country’s bond markets in the UK the net effect is equivalent to sales of about 7.4% of outstanding government debt. This is around 70% faster than the pace of the US Federal Reserve and well over twice the pace of the European Central Bank. It is unclear why the Bank is so hasty. The fast pace of gilt sales pushes down on prices, worsening the losses, and worse, crystalises the paper losses into a drain on the UK taxpayer.

The BoE is hurriedly reducing its balance sheet – going much faster than other central banks

(Decline since peak in the share of government debt held by the central bank)

Source: Bloomberg, Columbia Threadneedle

The losses of the QE experiment are huge. Even the BoE’s own numbers project eyewatering losses. Figures published by the Bank in August suggest over its lifetime, QE is likely to cost the state a net £110bn, around 5% of GDP1.  The BoE is choosing to rush to crystalise this loss now, rather than going slow or waiting for interest rates to go back down. Despite being mandated to support the “wider economic objectives” of the government, the Bank of England is rebuffing questions about these losses with Deputy Governor Ramsden stating: “The MPC does not take into account financial risk or profit when taking monetary policy decisions, including about the gilt portfolio”2.

For markets, the pace of such hefty selling pressure by the UK central bank could be one factor why gilts have struggled to attract buyers this year.  Historically UK government bonds were able to attract buyers without paying a premium to US Treasuries. Not so anymore. With QT – and of course many other factors – costs to borrow for the UK government now comfortably exceed those of the US.

Since the start of QT, borrowing costs have gone up much more for the UK than the US

(Government bond yields. %)

Since the start of QT, borrowing costs have gone up much more for the UK than the US

Source: Bloomberg, Columbia Threadneedle

Estimating how much of this change relative to the US comes from the hurried pace of QT in the UK is guesswork. Other dynamics are at play, including the worse inflation outlook in the UK or the impact of the Kwarteng budget. But if the extra QT accounted for half the change relative to the US, then the extra QT could be adding 0.4% per year to the borrowing costs of the UK government, based on the 10-year bonds3.

The reputation of the UK central bank took a beating when the UK infamously sold its gold holding at the bottom of the market. Blame for that decision is shared with the government of the time. But from a taxpayer point of view, the way the Bank went about implementing that those bullion sales left much to be desired. There are many parallels with the way the Bank is operating today. Similar preannouncements of sales are used, depressing prices. Similar disinterest is expressed by the BoE in the prices achieved and or scale of losses crystalised. And ahead of the next MPC meeting on 21 September similar fears exist in the market that the pace of sales might even increase. But if history rhymes with the past, the actions of the Bank of England could again mark the bottom of the market. For investors, with inflation now coming down and peak rates in sight, this could be an opportunity.

4 september 2023
Mahon_Christopher
Christopher Mahon
Head of Dynamic Real Return, Multi-asset
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The Bank of England is rushing to sell its gilts. For investors, this could be an opportunity.

1 Asset Purchase Facility Quarterly Report – 2023 Q2 | Bank of England

2 Quantitative tightening: the story so far − speech by Dave Ramsden | Bank of England

3 On the eve of QT in December 2021, UK gilts yield c.1.0%, some 0.5% less than US Treasuries. Today UK gilts yield around 0.3% more than US treasuries. In other words, since QT started UK gilts have increased in yield about 0.8% more than the US, despite similar levels of interest rate shocks. If the extra fast QT of the BoE accounts for half of this change, then this fast pace of QT in the UK is driving up borrowing costs by around 0.4%.

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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