Bank of England delays bond sales for a day to avoid clash with Hunt

The Bank of England is delaying the start of a major public debt sale by a day to avoid a conflict with the announcement of Jeremy Hunt’s budget plan.

Officials said they would start offloading bonds bought during years of emergency quantitative easing (QE) on Nov. 1.

The Bank has previously said it will begin this process on October 31 – when Mr Hunt, the new Chancellor, now intends to unveil his government’s plan to get the deficit under control.

Threadneedle Street also said it would initially sell only short-term government debt of the kind sparsely held by pension funds, to avoid a repeat of the market turmoil that has pushed some pension schemes to the brink. from the abyss following the mini-Budget.

In an announcement issued after markets closed on Tuesday, the Bank said: “In light of the government’s budget announcement now scheduled for October 31, 2022, the first gilt sale will now take place on November 1, 2022. »

He added that initial sales “will be split evenly across the short and medium-term sectors only.”

This marks a significant change from the original plan to sell bonds across different maturities evenly, but allows the Bank to continue with its plan to sell £40bn of bonds over the next year in a decisive step. to reduce its balance sheet.

QE has been used to support the economy during the financial and Covid crisis by using billions of pounds of newly created money to buy government debt.

This support ended last December, and since March the Bank has allowed bonds to mature without reinvesting the proceeds to buy new ones.

This process has already seen the Bank’s QE balance sheet fall from a peak of £895bn at the end of last year to just under £838bn worth of gilts and £18bn sterling of corporate bonds.

A combination of maturing gilts and active selling is expected to reduce the total by around £80bn more over the next 12 months.

The selling process was originally scheduled to begin late last month, but the Bank was forced to postpone it as part of efforts to calm markets after the mini-budget.

Sir Jon Cunliffe, the Bank’s Deputy Governor for Financial Stability, told MPs the ensuing pension squeeze has led to the five biggest daily moves in the market for inflation-linked government securities on 30 years since recordings began in 2000.

But he said officials’ decision to buy bonds to give liability-driven investment (LDI) funds time to stabilize their positions appears to have worked.

In a letter to the Treasury Select Committee, Sir Jon said: “Overall, market information suggests that LDI funds have raised tens of billions of pounds of capital and realized several billion pounds of sales of gilding, which will reduce their leverage,” he wrote.

“We know that the majority of the Bank’s gilt purchases came from LDI managers. As a result of these actions, the LDI funds reported to the Bank that they had enough capital to support much larger yield increases than before.

It comes as the government managed to borrow £2.5bn with a bond maturing in 2051, with an interest rate below 4.5%. Investors have offered more than £5bn for debt, indicating they appear willing to support long-term UK borrowing despite the turmoil of recent weeks.

Sallie R. Loera