The financial world is sounding an alarm over the UK’s government debt market. A coalition of powerful asset managers, overseeing over $1.5 trillion in funds, is urgently calling on the Bank of England (BoE) to completely stop selling gilts (UK government bonds) into an already unstable market.
They argue that the BoE’s current policy—known as Quantitative Tightening (QT)—is causing unnecessary stress on Britain’s borrowing costs and racking up massive bills for taxpayers.
The Problem: High Costs and Market Instability
Britain’s long-term borrowing costs are currently the highest among the world’s most advanced economies (the G7). This instability is driven by several factors, including stubborn inflation and general fiscal worries.
However, top fund managers say the BoE is making things worse by actively dumping its large holdings of gilts. Selling these bonds into a weak market drives their prices down and pushes interest rates up, which increases the cost of borrowing for the entire government.
Mark Dowding, CIO of Fixed Income at RBC BlueBay Asset Management, summed up the sentiment:
“Many investors including ourselves have been saying to the Bank of England you’re making the problem worse, not better. Stop doing this.”
The Taxpayer Burden: $29 Billion Annually
A major point of contention is who pays when the value of these bonds drops. The UK Treasury is required to compensate the central bank for any bond-market losses.
While taxpayers benefited when bond prices were rising, the situation has now reversed. Research suggests this arrangement is costing the government an estimated £22 billion (or $29.6 billion) annually. This staggering cost directly drains public finances at a time when the government is under immense pressure to boost economic growth.
The BoE had previously responded to criticism by pledging to slow the pace of its overall bond runoff from £100 billion to £70 billion annually. However, the investment managers insist this isn’t enough and are pressing for a complete halt to active gilt sales.
A “Leap in the Dark”
The BoE amassed a huge portfolio of £875 billion worth of government bonds between 2009 and 2021 as part of its Quantitative Easing (QE) program to support the economy during financial crises and the pandemic.
Now, the central bank is trying to offload them faster than other major central banks, and this aggressive reversal (QT) has been controversial. A 2024 Treasury Committee report even labeled the QT plan a “leap in the dark” due to the unexpected public money now at stake.
For example, one 40-year gilt issued in 2020 is now trading at only 24% of its original value, highlighting the significant losses the central bank is facing—and which taxpayers must cover.
Despite the current costs, the BoE argues that the net financial benefit to taxpayers since 2012 still amounts to £34 billion. Furthermore, the sales help improve a key measure of the current budget deficit targeted by the government.
However, as the UK’s budget announcement approaches, the pressure on the Bank of England to rethink its strategy and minimize the financial strain on the public purse continues to mount.
