Canada‑based investors are watching the United Kingdom's bond market with heightened concern after a group of analysts warned that the Bank of England should cease its active sales of gilts. The central bank's quantitative‑tightening strategy is adding supply to long‑dated UK government bonds, driving yields to levels not seen since the late 1990s and raising the cost of borrowing for the British Treasury.
Yield on the 30‑year gilt recently hit its highest point since 1998, while 10‑year yields remain above 5.1 per cent, a threshold last observed in the aftermath of the 2008 financial crisis. The surge mirrors a broader sell‑off in long‑dated sovereign debt that prompted U.S. Treasury Secretary Scott Bessent to double the government's buyback programme in an effort to curb the rise in yields.
Unlike the Federal Reserve and the European Central Bank, which have largely let bonds mature, the Bank of England has pursued an "active quantitative tightening" path, deliberately selling the more than £800 billion of gilts accumulated during QE. James Carter, co‑head of fixed income at W1M, argues that the UK no longer needs to add supply when the United States is already intervening to support long‑end yields.
Bank Governor Andrew Bailey defends the policy, saying it preserves firepower for a potential future round of QE. Critics, however, note that the balance sheet has already been reduced by roughly half since the programme began four years ago, and that the fiscal impact is becoming increasingly pronounced. Estimates released in the latest Monetary Policy Report suggest the QT programme has added up to 30 basis points to long‑term yields, translating into a fiscal cost of up to £125 billion per year.
Canadian pension funds and bond managers, which hold significant allocations to foreign sovereign debt, are likely to reassess risk premiums on UK gilts. A slowdown or halt in active sales could ease pressure on yields, potentially narrowing the spread between Canadian and UK government bonds and influencing portfolio rebalancing decisions.
Analysts at Deutsche Bank expect the Monetary Policy Committee to vote next month for a reduced pace of balance‑sheet reduction, possibly limiting sales to £50 billion or ending active sales altogether. If the Bank of England follows that path, it would bring its approach more in line with the Bank of Canada, which has largely let its holdings mature without active disposal.