BoE QT Plans Spark Yield Curve Control Fears in UK Bond Market

The Bank of England (BoE) has announced updated plans for quantitative tightening (QT), which will have a significant impact on the UK's gilt market. The BoE now plans to keep GBP120 billion of gilts maturing in 2049 or later on their balance sheet, using them as matching assets against future bank note issuance.

This move is expected to reduce supply expectations and drive down yields at the long end of the curve. Specifically, the 30-year yield dropped sharply by almost 10 basis points (bps). The scaling back of supply expectations also led to a decline in yields for gilts maturing between 2035 and 2049.

The BoE's plans involve selling GBP146 billion of Gilts at an annual pace of GBP20 billion, but instead of directly hitting the market, these sales will be sold back to the government through the Debt Management Office (DMO). The government purchases will then be funded by additional debt issuance. This approach allows the government to better time and adjust the maturity of supply hitting the market.

Analysts view this move as a form of yield curve control, similar to the US Treasury's recent decision to expand long-term bond buybacks. However, the size of the BoE's planned annual debt sales is relatively small compared to the total issuance of GBP246 billion for the current fiscal year.