The Bank of England’s unwinding of its multi billion-pound bond portfolio is comparable to former Chancellor of the Exchequer Gordon Brown’s infamous decision to “sell gold at the bottom of the market” from 1999 to 2002, the asset manager Columbia Threadneedle said.
(Bloomberg) — The Bank of England’s unwinding of its multi billion-pound bond portfolio is comparable to former Chancellor of the Exchequer Gordon Brown’s infamous decision to “sell gold at the bottom of the market” from 1999 to 2002, the asset manager Columbia Threadneedle said.
Christopher Mahon, head of dynamic real return at Columbia, said households, businesses and the government are paying an interest-rate penalty because the BOE is selling assets more aggressively than other central banks.
The UK Treasury missed out on at least £2 billion ($2.5 billion) from the gold sales, according to later estimates, and is facing annual losses of around £3 billion now as the BOE rushes to dump gilts under quantitative tightening with little regard for the price.
“More than any other central bank, the Bank of England is in a hurry to reduce its balance sheet, running up huge losses for the taxpayer,” Mahon wrote in a note to clients. “Is this another ‘selling gold at the bottom’ moment?”
Mahon estimates that the BOE’s QT program is “adding 0.4% a year to the government’s borrowing costs, based on the 10-year bonds … with knock-on implications for borrowing costs corporates and households alike.”
Using fiscal calculations from the Office for Budget Responsibility, a 0.4% increase in gilt yields would leave losses of about £3 billion annually after five years.
Mahon’s comments come just days ahead of the BOE’s next interest rate decision on Sept. 21, when officials will decide the new pace of bond sales for the 12 months from October. The BOE has been offloading £80 billion of bonds a year and has signaled it could increase the pace to as much as £100 billion.
“Other central banks are treading gently, but not so the Bank of England,” Mahon said.
The BOE didn’t immediately respond to a request for comment.
After the 2008 financial crisis, when interest rates were cut close to zero, major central banks started buying assets under quantitative easing to reduce borrowing costs in financial markets further than they could with a change to key lending rates alone. At its peak, the BOE bought £875 billion of government debt and £20 billion of corporate bonds. It began QT in February last year, first by letting maturing bonds roll off the balance sheet and in November by starting active sales.
Financial Drain
Rising interest rates have turned what was once a money-spinner for the government, as the bonds were profitable in a time of low interest rates, into a drain on its finances. The bank now expects losses on the program of around £250 billion over the coming years, leaving taxpayers nursing a net loss of more than £100 billion.
Mahon said: “It is unclear why the bank is so hasty. The fast pace of gilt sales pushes down on prices, deepening the losses, and worse, crystalizes the paper losses into a drain on the UK taxpayer.”
The BOE has repeatedly insisted that the “impact of QT on financial markets has been small” and that it needs to build up policy headroom quickly to prepare for a possible future crisis. Its estimate is that QT has increased government borrowing costs by no more than 0.15%.
Deputy governor Dave Ramsden has said the BOE “does not take into account financial risk or profit when taking monetary policy decisions, including about the gilt portfolio.”
Mahon’s calculations show that after adjusting for the sizes of relative bond markets, the pace of sales has been around 70% faster at the BOE than the US Federal Reserve and over twice the pace of the European Central Bank.
“For markets, such hefty selling pressure could be one factor why gilts have struggled to attract buyers this year. Historically UK government bonds were able to attract buyers without paying a premium to US Treasuries. Not so anymore,” he said
A premium of about 0.8 percentage points has opened up with the US, about half of which Mahon estimates can be accounted for by the extra QT.
Although the decision to sell the gold in 1999 was the government’s, Mahon said the bank’s reputation “took a beating” because the way it implemented to plan “left much to be desired.”
“There are many parallels with the way the bank is operating today,” Mahon added. “Similar pre-announcements of sales are used, depressing prices. Similar disinterest is expressed by the BOE in the prices achieved.”
–With assistance from Andrew Atkinson.
(Adds comment on comparison with gold sales)
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