UK borrowing costs dropped sharply after the Bank of England confirmed it would stop selling long-dated government bonds, sending 30-year gilt yields lower by more than 0.1 percentage points.
The decision means the central bank will keep £120bn of long-dated gilts permanently on its balance sheet, reducing future pressure on the market for the UK’s longest-maturity government debt.
Yields on 30-year gilts fell from 5.87pc to 5.73pc, marking one of the largest daily declines since May and providing relief for the government as it manages elevated financing costs.
Bank Of England Says Decision Was Planned Before Market Turmoil
According to The Telegraph, officials at the Bank of England, the Treasury, and the Debt Management Office (DMO) had prepared plans to stop long-term bond sales before the announcement.
Andrew Bailey, the Bank’s Governor, rejected suggestions that the move was designed to reduce borrowing costs for the government during a period of market pressure.
Mr Bailey claimed the decision was taken after months of planning. He said: “It hasn’t been made on the basis of saying markets look disturbed.
“We were planning this work well before the conflict broke out in the Middle East. So it’s not a reaction to market conditions at all.
“We have to make our decisions at the right time as we see it. And in the right way. And that’s what we do.”
The Bank of England had accumulated around £895bn in gilts through its bond-buying programme during the pandemic and the financial crisis. It later began quantitative tightening (QT) by selling parts of that portfolio back to investors.
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Gilt Sales Had Added Pressure To Long-Term Borrowing Costs
The central bank’s bond sales generated losses because many of the gilts were sold at prices below those paid during the earlier purchase programmes. Those losses have affected the cost to taxpayers.
Stopping active sales of long-dated bonds is expected to reduce future supply pressure in the market. Deutsche Bank estimated the change could save around £2.5bn a year.
Modupe Adegbembo from investment bank Jefferies said the decision pointed to a lower future supply burden for the longer end of the gilt market.
“Active sales are not the only reason for long-end gilt underperformance, but reducing the likelihood of future sales removes an important source of pressure on the sector,” Ms Adegbembo said.
The Bank had previously acknowledged that QT may have pushed borrowing costs higher by as much as 0.3 percentage points, a level similar to the effect of an interest rate increase.
Political Debate Continues Over The Future Of Quantitative Tightening
The decision has renewed debate among politicians and economists over the wider structure of the Bank’s bond-buying programme.
Richard Tice, deputy leader of Reform UK, welcomed the announcement and called for further changes to the way the central bank manages its bond holdings.
Mr Tice wrote to John Healey this week to demand a debate on the issue.
He added: “Bond yields have already responded positively, as I predicted. Reform’s advice to the Bank of England is helping dig the Chancellor out of a massive financial black hole.”
Reform UK has argued that a broader overhaul of bond sales could create significant savings for taxpayers, while Andrew Bailey said proposals to change how commercial bank reserves are handled could affect the Bank’s ability to control borrowing costs.
Bank Keeps Focus On Market Functioning
The Bank of England said ending long-term gilt sales would support market efficiency and allow the Debt Management Office to remain the sole official supplier of government debt.
The move changes the way the central bank reduces its balance sheet, leaving future decisions on bond holdings and monetary policy under continued review. The Bank confirmed it will retain £120bn of long-dated government bonds rather than sell them back to the market.
