UK debt office should handle BoE’s gilt sales

They suggest that the United Kingdom debt management office handle the sale of the BoE’s assets along with its regular issuance of gilts, simplifying the process and preventing “toes getting trodden on.”

LONDON: The Bank of England (BoE) (pic) should “hand over the keys” of quantitative tightening to the government when it begins to actively sell gilts back to the market, according to Bank of America Corp strategists including Mark Capleton.

They suggest that the United Kingdom debt management office handle the sale of the BoE’s assets along with its regular issuance of gilts, simplifying the process and preventing “toes getting trodden on.”

“Many (perhaps the consensus) will assume that the bank will shed its gilt portfolio in the same way it acquired it, and that‘s quite likely,” they wrote in a note to clients. “Nevertheless, however well this method is organised, it is easy to see how it could get messy, and we strongly suggest there are better ways.”

Bank of America sees the process of active sales starting in November and £100bil (RM566bil) of total quantitative tightening in total taking place in fiscal year 2023 and 2024.

The first stage of the process started when the BoE raised rates to 0.5% on Thursday, which means halting reinvestment of the proceeds of maturing bonds.

The central bank reiterated that it would only consider selling bonds from its £875bil (US$1.15 trillion or RM4.96 trillion) gilt portfolio once its key interest rate reaches 1%, which the market is wagering could happen as soon as May.

The BoE has so far given little detail on how the mechanics of active sales would work. Officials would have to “find our way” and that there was no target for the amount of balance-sheet reduction yet, governor Andrew Bailey said in an interview with Bloomberg TV on Thursday. — Bloomberg

Capleton and his colleagues outlined different levels of DMO and BoE coordination for bond sales.

These include: the DMO advising the central bank on which gilt profile would be best to sell; and the DMO choosing which gilts to sell as appropriate and delivering the required monthly quantitative tightening proceeds to the central bank.

“Does this encroach upon BoE independence?” asked the strategists.

“Really it just separates monetary policy from management of the national debt, giving debt management back to the debt manager.” - Bloomberg