Bank of England bond sales creating a ‘selling gold at the bottom’ moment, strategist says

by | Sep 11, 2023 | Financial

People walk outside the Bank of England in the City of London financial district, in London, Britain, January 26, 2023.Henry Nicholls | ReutersLONDON — The Bank of England’s rapid pace of bond sales is creating a “selling gold at the bottom” moment for investors, according to Christopher Mahon, head of dynamic real return at Columbia Threadneedle.In the aftermath of the 2008 financial crisis, the central bank spent 13 years buying up £895 billion ($1.12 trillion) of U.K. government bonds — known as gilts — while interest rates were historically low.Now, despite the fact that the value of gilts has fallen dramatically since then, the central bank is unwinding those holdings, and fast.Among all the central banks, the Bank of England has been the most aggressive in selling the bonds purchased to bolster the economy during the quantitative easing era, according to Mahon.”Selling bonds on this scale has never been done before, nor has it been tried when bond markets have had to digest the ramifications of both high inflation and substantial rate hikes,” he said in a video blog last week.The BOE is crystallizing massive losses as a result of the sales, which are being backstopped by the U.K. Treasury. In late July, the central bank estimated that it would require the Treasury to indemnify £150 billion ($189 billion) of losses on its asset purchase facility (APF).”Our analysis suggests the reduction has been the equivalent of around 7.5% of all outstanding government debt,” Mahon said. “This is a huge amount, and is effectively additional issuance that the market has had to digest.”Yields on benchmark 10-year U.K. gilts have risen from around 2.99% in early February to a 13-year high of almost 4.75% in mid-August, before moderating slightly. Yields move inversely to prices.Columbia Threadneedle’s analysis suggests that the pace of bond sales is 70% faster than that of the U.S. Federal Reserve and around twice the rate of the European Central Bank.”It’s unclear to us why the Bank has been so hasty. The fast pace of these sales has been pushing down on gilt prices, it’s been worsening the losses for the taxpayer, and worse, it crystallizes what would have been paper losses …

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