Will the BoE's new QT plan affect yields?
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The Bank of England has set out a multi-year plan to sell £20bn of its gilts stock annually, rather than deciding on the amount each year. In addition, the Bank, Treasury and Debt Management Office are currently exploring whether gilts can be sold back to the government rather than on the open market. Yields on 30-year gilts have fallen since the announcement.
The BoE explained its new approach to so-called quantitative tightening on Thursday, when it also decided to keep the Bank Rate at 3.75% despite an expected spike in inflation.
The BoE said the outstanding stock of gilts held for monetary policy purposes, £368bn, would be unwound, but it plans to keep £120bn aside for backing banknote issuance. The Bank plans to let £222bn of gilts mature and sell £146bn, meaning its stock would reduce by about £46bn a year until 2034. Active sales would be set at £20bn a year.
“On balance, most Monetary Policy Committee members judged that the benefits of a fixed intended pace of unwind and the predictability that entailed would outweigh the loss of flexibility,” the Bank said.
Could the government buy back its debt?
In a new move, the central bank has engaged with the Treasury and the Debt Management Office to consider a model whereby the decision to sell £20bn a year could be implemented through “sales to the government”.
It said this is because, “in light of the MPC’s multi-year plan, some portion of the remaining portfolio of gilts held for monetary policy purposes in the [Asset Purchase Facility] would likely become less aligned with market demand as unwind continued”.
Whether it will happen or not is not decided. Buying back debt could help the government to bring down its borrowing costs, but the affordability of the plan might depend on global events and the chancellor’s Budget at the end of next month. The issue is due to be reviewed before April 2027, when the BoE says how it will proceed; Bank APF auctions would pause in the meantime.
DB schemes sitting pretty
The yield on 30-year gilts was at 5.74% on Thursday, down 12 points on the day before. Falling yields impact the funding position of defined benefit pension schemes, but the market’s view on UK government bonds is unlikely to change drastically based on the BoE’s decision alone, given fiscal pressures and the global inflation outlook.
The Pensions Regulator’s recent overview of DB and hybrid schemes found that more than a third (67%) of schemes in the latest tranche had a surplus, with the median technical provisions funding level rising to 104% from 94% three years earlier. The Pension Protection Fund’s measure showed schemes had a combined funding level of 133.4% at the end of August.
QT has been blamed by some market commentators for driving up gilt yields, although the Bank of England previously downplayed the effect of QT on gilt markets. In 2022, it said QT expectations had pushed yields on 10-year gilts up by just 10bps, but now said its staff thinks the effect is 20-30bps.
