Report: Bank of England plans to pause long-bond sales, the most aggressive "balance sheet reducer" in the global bond storm applies the brakes.

Report: Bank of England plans to pause long-bond sales, the most aggressive "balance sheet reducer" in the global bond storm applies the brakes. The Bank of England reportedly plans to stop selling its holdings of 20-year and 30-year long-dated government bonds as part of a comprehensive overhaul of its bond sale program. The report, citing sources, said officials from the Bank of England, the Treasury and the Debt Management Office (DMO), which issues debt on behalf of the government, have drafted the proposal, but did not disclose the sources, and the final decision remains in the hands of the Bank of England. The report said the Bank of England is expected to formally announce the decision on Thursday alongside its monetary policy decision. In the global bond market turmoil, the most aggressive balance sheet reducer is the first to stop. This adjustment comes against the backdrop of long-term government bond yields rising to multi-decade highs. The yield on 30-year UK government bonds is currently above 5.9%, a level not seen since the 1990s; prices of 20-year and 30-year government bonds fell last week to their lowest since 1998. The Bank of England is the most aggressive central bank in the Group of Seven in reducing its balance sheet, and is the only major central bank to actively sell bonds to the market before they mature. Since 2009, it has accumulated bond holdings of as much as 895 billion pounds through quantitative easing, and that portfolio has now fallen to about 490 billion pounds, of which about 150 billion pounds is in long-dated government bonds with maturities of more than 20 years. Market participants expect the Bank of England to slow the pace of balance sheet reduction to 500 billion pounds per year over the 12 months starting in Octoberlower than the 700 billion pounds of the previous two years and the 1 trillion pounds of the year before that. This means the scale of active sales remains at about 20 billion pounds. However, long-dated government bonds account for only about 20% of the current scale of active saleseven if the same pace and structure are maintained, only about 4 billion pounds of this holding would actually be sold. Mike Bell, head of market strategy at RBC BlueBay Asset Management, expects the central bank to shift sales toward medium- and short-term maturities, and said "a complete halt to long-bond sales would not be surprising." In fact, the Bank of England's "braking" has already begun: over the past year, it sold only about 4 billion pounds from a long-dated portfolio of more than 150 billion pounds, mostly concentrated in two ultra-long bondsat that pace, it would take more than 24 years to fully exit. In last quarter's auction plan, the number of auctions for government bonds with maturities of more than 20 years had already fallen to zero, the first time since the active sales program began in January 2023. Tomasz Wieladek, chief European macro strategist at T. Rowe Price, believes that a market-neutral and prudent approach would inherently mean reducing or even stopping sales of long-dated government bonds, because demand from pension funds for this part of the bond market has already shown a structural decline. The bill for "losing half on every sale" The core of the problem is losses. The Bank of England bought bonds heavily when prices were high, but is now selling at low pricesDeutsche Bank analysts estimate that the average discount rate on long bonds sold by the central bank during quantitative tightening is as high as about 50%. The consensus in the economics profession is that since 2022, the rapid selloff of long-dated bonds has cost UK taxpayers about 22 billion pounds; the Office for Budget Responsibility (OBR) even estimates that the total cost of completely emptying the portfolio over the next five years will be about 100 billion pounds. After halting long-bond sales, the Bank of England's active sales will continue (about 20 billion pounds per year), but it will completely divest long-dated debt; at the same time, the central bank will sell its holdings of medium- and short-term government bonds directly to the Treasury's DMO to help smooth additional pressure from government debt supply. This "New Zealand model" was discussed as early as 2022, but was shelved due to concerns about undermining monetary policy independence. Compared with maintaining the current pace of sales, stopping long-bond sales is expected to save the Treasury about 2.5 billion pounds directly each year until the end of this decadethis will provide valuable room for maneuver for new Chancellor of the Exchequer John Healey's first budget on October 28. But the other side of the coin is equally clear: stopping the sale of loss-making bonds means the central bank retains more reserves, and the Treasury must pay more interest on them, which will make it harder for Healey to meet the fiscal rule of "balancing day-to-day spending." Bank of England Governor Bailey has repeatedly defended the previous sales strategy, insisting that stopping sales immediately would only force losses that are bound to be borne to be spread over a longer time span. Thursday's decision: rates on hold, and a divided vote The market is focused on Thursday's Monetary Policy Committee (MPC) meeting. The market widely expects the Bank of England to keep rates unchanged (currently about 3.75%)after Bailey rebutted the idea last week in parliamentary testimony that a rate hike was "inevitable." But a divided vote within the committee is very likely, and investors will be watching the number of dissenting votes closely. UK data are also dense this week: August inflation data will be released on Wednesday, and employment data released on Tuesday were mixedthe ILO unemployment rate for the three months through July held steady at 4.9% (expected to rise to 5%), but the number of people claiming unemployment benefits increased by 27,800, more than triple expectations. The shadow of rate hikes has not dissipated. Affected by the Iran conflict pushing up oil prices, UK gasoline and diesel prices have risen to their highest since 2022, and the market is currently heavily betting that the Bank of England will raise rates four times next year. Goldman Sachs turned hawkish on Monday, expecting a 25 basis point hike in November; Citi joined the hawkish forecast camp the same day. UBS expects Thursday to be a "hawkish hold."