British pension funds want the Bank of England to keep buying bonds beyond this week

Bank of England governor Andrew Bailey has said officials would suspend quantitative tightening in times of market turmoil and a very clear timetable of sales would be made transparent.

The Bank of England may be forced to push back a long-awaited plan to start selling bonds this month after a fresh bout of market panic.

The central bank has already postponed a so-called active quantitative tightening programme to the end of the month and has had to start buying debt to prop up the market. Many investors and analysts are now betting bond sales will be delayed even longer.

“I would imagine they will keep kicking the can down the road until the market finds more stable footing,” said James Lindley, a portfolio manager at Columbia Threadneedle. 

“The bank is going to be far, far more nervous about potentially adding to the dysfunction of the gilt [bond] market,” he said. 

A lengthy delay could throw the Bank of England's painstakingly-laid plans to reduce a balance sheet of over £800bn (€912.4bn) into disarray, following years of purchases since the credit crisis and pandemic. But policy makers will be fearful of helping trigger another selloff that could see the British economy spiral into a fresh financial crisis.

Bank of England governor Andrew Bailey has said officials would suspend quantitative tightening in times of market turmoil and a very clear timetable of sales would be made transparent.

Emergency measures

Policy makers have already been forced to expand the scope of emergency measures to add inflation-linked bond debt to purchases in an effort to stop “fire-sale dynamics”. 

While that initially sparked a rally in bonds, long-dated yields have begun rising again, following a record surge in real yields earlier this week. Many pension funds want the central bank to keep buying bonds beyond this week, an industry association said.

“If the market is already shifting yields aggressively higher with the BoE in the market on the buying side, how will the market deal with an active QT programme, where a pre-defined size will have to be pushed into the market?” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

Altaf Kassam at State Street Global Advisors said it was unlikely policy makers would stick to the plans for quantitative tightening that would involve selling £10bn in bonds per quarter.

Prior to the postponement of bond sales, officials had repeatedly stressed there would be a high bar for delaying the start, with only “very distressed” market conditions warranting a change of plan. It could argue those terms have been met.

Thirty-year gilt yields rose at one stage on Tuesday to 4.76%, the highest since a spike on September 28 that triggered the Bank of England's first intervention. 

The bond sales are meant to start on October 31, the same day  chancellor Kwasi Kwarteng is set to release a medium-term fiscal plan. Current borrowing proposals would see record gilt supply hitting the market in coming years, according to some estimates. 

• Bloomberg