Christopher Mahon of Columbia Threadneedle has reported that out of all the central banking institutions, the Bank of England has been the most vigorous in the divestment of bonds procured to increase the economy during the time of quantitative easing. The 10-year benchmark UK government bonds had a 2.99% yield in the beginning of February that went up to 4.75% (a 13-year high) in mid-August before subsiding a bit. When the yields increase, the prices go down. According to Mahon, “The measures taken by the Bank of England could possibly signify the lowest point of the market.”
Christopher Mahon, Head of Dynamic Real Return at Columbia Threadneedle, has suggested that the Bank of England's sudden increase in bond sales might create conditions akin to "selling gold at the bottom" for investors. This follows the central bank's buying up of £895 billion ($1.12 trillion) worth of U.K. government bonds (gilts) in the aftermath of the 2008 financial crisis, while interest rates were at all-time lows. Now, the central bank is unwinding said holdings at a much faster rate, even though the value of gilts has declined significantly. Mahon also pointed out that the Bank of England is, when compared to all other central banks, the most assertive when it comes to selling the bonds purchased during the quantitative easing era.
Never before has a bond sale of this size taken place, nor has it been attempted at a time when bond markets have had to grapple with both high inflation and substantial rate hikes, he noted in a video blog last week. The BOE is realizing large losses as a consequence of the sales, which it has made arrangements with the U.K. Treasury to cover. In late July, the central bank predicted it would need the Treasury to secure £150 billion ($189 billion) of losses on its asset purchase facility (APF).Mahon indicated that their study indicates the decrease has been similar to roughly 7.5% of all existing government debt. "This is a sizable amount, and it is effectively extra issuance that the market has had to cope with," he said.Yields on the benchmark 10-year U.K. gilts have progressed from around 2.99% in early February to a 13-year high of almost 4.75% in mid-August, before stabilizing to some extent. Yields move inversely to prices.Columbia Threadneedle's investigation proposes that the speed of bond sales is 70% higher than that of the U.S. Federal Reserve and almost twice the speed of the European Central Bank.
"It is uncertain to us why the Bank has been so hasty. The accelerated rate of these sales has been pushing down gilt prices, it has intensified the losses for the taxpayer, and even worse, it is changing what would have been unsubstantial losses into an expenditure the U.K. Treasury has to reimburse," Mahon said."For markets, the intensity of this large-scale selling pressure by the U.K. central bank is in our assessment, a chief factor in why gilts have struggled this year and failed to find buyers."
The U.K. has definitely made some questionable decisions when it comes to the large-scale divestment of assets. From 1999 to 2002, they threw away 401 metric tons of gold - a part of their total reserve of 715 tonnes - at a time when the cost of the precious metal was at its lowest.
Mahon noted the Bank of England's approach to its gilt stock is similar to what he has seen before, including the pre-announcement of sales to reduce prices, the Bank's lack of concern for the prices or losses made, and the market's fear of the sales increasing. He believes this approach might mark the market's bottom and could be a chance for investors, given inflation and interest rates are going down. When contacted by CNBC, the Bank declined to comment. Mahon also stated that he thinks gilts and fixed income are priced very well.
At its last gathering, the Monetary Policy Committee of the central bank didn't provide any additional details concerning its plans regarding gilt sales. Nevertheless, Deputy Governor Dave Ramsden proposed a possible intensification of quantitative tightening in July. Based on a study conducted by BNP Paribas economists last month, it is anticipated that the Bank of England will raise the rate of gilt sales from £80 billion to £95 billion in a year. Nevertheless, the Bank of England asserted that the asset sales have no substantial influence on markets. In his July address, Ramsden stated that “QT [quantitative tightening] effects on gilt yields, while greater than zero, appear to be materially smaller than the effects of QE [quantitative easing].” He also surmised that in current market conditions, a one-time additional £80 billion of QT in relation to expectations is likely to rise 10-year gilt yields by less than 10 bps.
The Monetary Policy Committee of the central bank is due to assemble on Sept. 21. At its previous gathering, the committee didn't provide any extra info related to its gilt sales plans. On the other hand, Ramsden recommended an intensification of quantitative tightening in July. BNP Paribas economists speculated in a research note last month that the Bank of England will raise gilt sales from £80 billion to £95 billion in a year. But the Bank of England denies that the asset sales have a consequential effect on markets. In his July speech, Ramsden said that assessment of the evidence suggests that the effects of QT on gilt yields, although significant, are smaller compared to the effects of QE. He also expressed that, based on the existing market conditions, an additional £80 billion of QT to current expectations is likely to increase 10-year gilt yields by less than 10 bps.
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