The Bank of England is set to delay more government bond sales until markets calm down

The Bank of England is set to postpone the sale of billions of pounds of government bonds in a bid to promote greater stability in the gold markets following the UK’s failed “mini” budget.

The bank had already postponed the start of the sale of 838 billion pounds of gold bonds purchased under the quantitative easing program from October 6 to the end of this month. It is now expected to bow to investor pressure for more pauses until the market becomes calmer.

The Financial Times has learned that senior bank officials came to that view after judging the gold bond market as “extremely distressing” in recent weeks, a view backed by the Financial Policy Committee.

Investors also warned that the central bank’s plans to start selling bonds in its portfolio at the end of this month could destabilize markets.

Although US 30-year Treasury yields have fallen from a recent high of more than 5 per cent to 4.32 per cent on Monday, they are still well above the 3.75 per cent reached before the mini-budget.

“I’m not sure it would be wise for them to leave immediately, because the market is so fragile right now,” said Jim Levis, chief investment officer for fixed public income at M&G Investments.

Sandra Holdsworth, head of interest rates at UK Aegon Asset Management, added: “When they have had to support the market recently, I am not sure they can move forward without risking further problems.”

The BoE’s turnaround is set to suspend the start of the UK’s undoing of quantitative easing – a process other central banks have begun to reduce their bloated balance sheets and increase their freedom to maneuver in any future monetary or financial crisis.

BoE officials maintain that inflation control can be implemented by changing interest rates, rather than by so-called quantitative tightening, which is the opposite of quantitative easing. At the speed set by the bank, it will take a decade or more to complete the QT.

In Washington on Saturday, Bank of England Governor Andrew Bailey confirmed that the Monetary Policy Committee will seek to use bank rates rather than asset sales as a key weapon in the fight against inflation.

He told an audience of central bankers: “The monetary policy committee is not using asset stocks as an active monetary policy tool at present.” He added, “The goal was to undo the quantitative easing stockpile gradually and predictably, and in a way that is not linked to the underlying economic conditions.”

Delaying the bond sale would not need a vote from the bank’s monetary policy committee. In its earlier postponement last month, the bank saw turbulent market conditions met the “maximum” it had set to change the timing without a vote.

The Bank of England is still hoping to dispose of 80 billion pounds of assets in the first year of a decline in its balance sheet through a combination of accrued assets and active sales.

The bank is likely to adhere to its policy of allowing maturing bonds to expire without reinvesting their proceeds in other securities. But Antoine Buffett, interest rate analyst at ING, said the brisk sales could spark more market turmoil, hurt the economy, and complicate plans to raise interest rates.

“You don’t want to let anything spoil your chances of raising rates further, which is the only proven tool for lowering inflation,” Buffett said. “I’m not sure this market can absorb the BoE sell-off as well.”

Some analysts argue that the BoE may need to adjust its plans when it decides to start quantitative tightening.

Daniela Russell, head of UK price strategy at HSBC, said that rather than selling roughly equal amounts of bonds in the short, medium and long term, the central bank should focus on short maturities. It added that this would allow the long end of the gold market, which has been the focus of the chaotic sell-off that led to a liquidity crisis in pension funds, “to continue the recovery.”

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