BoE further delays government bond sales until markets calm down

The Bank of England is likely to delay the sale of billions of pounds of government bonds in a bid to promote greater stability in gold markets after the UK’s failed ‘mini’ budget.

The bank had already postponed the start of the sale of £838 billion in government bonds bought under its quantitative easing program from October 6 to the end of this month. Now it is expected to bow to investor pressure for a further pause until the market calms down.

The Financial Times has been informed that the bank’s top officials have come to this position after assessing the gold market as “deeply troubled” in recent weeks, a position supported by the Financial Policy Committee.

Investors have also warned that the central bank’s plans to start selling bonds in its portfolio by the end of this month could destabilize markets.

While 30-year gold yields have fallen from their recent high of more than 5 percent to 4.32 percent on Monday, they remain well above the 3.75 percent reached before the mini-budget.

“I’m not sure it’s wise for them to leave right away because the market is so fragile right now,” said Jim Leaviss, chief investment officer for public fixed income at M&G Investments.

Sandra Holdsworth, UK Head of Rates at Aegon Asset Management, added: “If they’ve had to support the market so recently, I’m not sure they can continue without risking more trouble.”

The BoE’s shift is expected to delay the start of QE winding down in the UK – a process that other central banks have begun to reduce their bloated balance sheets and increase their room for maneuver in a future monetary or financial crisis.

BoE officials argue that inflation control can be implemented by changing interest rates, rather than through so-called quantitative tightening, the reverse of QE. At the pace set by the bank, completing QT would take a decade or more.

In Washington on Saturday, BoE governor Andrew Bailey confirmed that the MPC would try to use bank rates rather than asset sales as the main weapon in the inflation battle.

“The MPC is not currently using the stock of assets as an active tool of monetary policy,” he told an audience of central bankers. “The intent was to phase out QE inventory gradually and predictably, and in a way that was not tied to underlying economic conditions,” he added.

Postponing bond sales does not require a vote from the bank’s Monetary Policy Committee. In the previous postponement last month, the bank ruled that the turbulent market conditions met the “high bar” it had set to change the timing without a vote.

The BoE still hopes to settle £80bn of assets in the first year of winding down its balance sheet through a combination of maturing assets and active sales.

The Bank is likely to maintain its policy of maturing maturing bonds without reinvesting the proceeds in other securities. But active sales could cause further market turmoil, hurt the economy and complicate plans to raise interest rates, said ING interest rate strategist Antoine Bouvet.

“You don’t want to let anything hinder your chances of getting rates to rise further, which is their only proven tool for lowering inflation,” Bouvet said. “I’m not sure this market can accommodate BoE sales as well.”

Some analysts argue that the BoE may need to revise its plans if it decides to embark on quantitative tightening.

Instead of selling roughly equal amounts of short-, medium- and long-term government bonds, the central bank should focus on short-term maturities, says Daniela Russell, head of HSBC’s UK interest rate strategy. That would allow the long end of the gold market, which has been at the center of the chaotic sell-off that sparked a liquidity crisis among pension funds, to “continue to recover,” she added.

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