The central bank’s decision to speed up the rate at which it is selling government bonds can “only lead to higher yields”, some experts have forecast.
Last week, the Bank of England’s Monetary Policy Committee voted by a majority of five to four to maintain the base rate at 5.25 per cent — the first sign that the Bank’s rate rises could have hit their peak.
In the background, however, the central bank also voted unanimously to reduce the stock of UK government bond purchases held by £100bn over the next year, increasing the rate at which it was selling gilts.
Over the past 12 months, the bank has reduced its stock by £80bn.
“Quantitative tightening, at the current rate or faster, can only really lead yields higher when viewed solely through the lens of supply,” said Alex Harvey, an investment strategist at MGIM.
Quantitative tightening is a deflationary tactic used by central banks. It involves the Bank selling government bonds, or letting them mature and removing them from their balance sheet.
Economic theory suggests that increasing the supply of bonds — and removing a large buyer like the BoE from the market —should put downward pressure on prices. When bond prices fall, yields head skyward.
QE queries
It is the opposite of how the central bank has behaved for much of the past decade. Quantitative easing (the opposite of tightening, where the Bank is a net buyer of gilts) had been the policy since the financial crisis and had helped keep interest rates low.
“The BoE’s decision to reduce to the stock of UK government bond purchases by £100 billion over the next year, while keeping rates higher for longer, means that the gilt yield curve is poised to bear-steepen,” said Althea Spinozzi, senior fixed income strategist at Saxo.
A bear steepening yield curve is typically bad news for bond investors, as it pushes down bond prices (and pushes up yields).
Others are less convinced that the Bank of England’s policy will impact bond markets to this extent, if at all.
Kelly Gemmell, senior fixed income product specialist at Vanguard, said that the increase in quantitative tightening had largely already been priced in by the market, and that any steepening was driven more by the global macro picture than any specific BoE move.
Tom Hopkins, portfolio manager at BRI Wealth Management, agreed.
“The BoE’s increase in quantitative tightening is only modest,” he said. “Last year’s "mini" budget disaster is still fresh in investors’ minds meaning the Bank will be treading very carefully, and the modest pick up in pace is unlikely to disrupt bond markets.
“There does remain a risk that tightening could have an outsized effect on liquidity conditions, however given that the Bank will be treading carefully, this risk appears small for now.”
Imogen Tew is a freelance financial journalist
