BoE holds at 3.75% and pulls long-dated gilts out of quantitative tightening

The Bank of England paused gilt auctions on Thursday and took its longest bonds out of quantitative tightening, stretching the rest of the rundown to 2034. It held Bank Rate at 3.75%. Active sales stop while the Bank reviews a model in which the government, not the market, would buy what remains.

That is a gilt-supply decision, not a rate surprise. By 8:34 a.m. ET, the 30-year yield was at 5.758%, from 5.839% just before the decision, an 8-basis-point decline on those prints. The 10-year was at 5.222%, from 5.295%.

A slower rundown, and a different seller

The committee voted unanimously to reduce the stock of gilts held for monetary policy, and financed by central-bank reserves, to zero. The path is a multi-year plan: annual sales of £20 billion alongside maturing bonds, for an average reduction of £46 billion a year through the end of 2034.

Most of what is left will never be sold. The Bank will hold to maturity £222 billion of gilts that come due before 2035. A further £120 billion of the longest-dated gilts, including part of the 1.75% 2049 bond and everything that matures after it, stays in the Asset Purchase Facility to back current and future banknote issuance. That leaves £146 billion of gilts maturing between 2035 and 2049 as the sale pool, all in original purchase-proceeds terms, the amount the Bank paid rather than today’s market value.

Auctions of those bonds pause while the Bank reviews a model in which HM Treasury would instruct the Debt Management Office to buy the 2035-2049 gilts at market prices, in a pre-announced programme. Progress will be reviewed before April 2027 so that, if it proceeds, the purchases can be written into the DMO’s annual financing remit. Operational details come by April 2027 either way.

The comparison that matters is with the last QT year, not a headline cut from £70 billion to £20 billion. Last September the committee targeted a £70 billion reduction from October 2025 to September 2026. The minutes say the stock actually fell by that amount over the past 12 months, but only £21 billion of it was sales. The new £20 billion sales pace is in line with that; the slowdown is in the total rundown, to £46 billion a year, because more of the book will now be allowed to mature or be set aside for banknotes.

The Treasury would take the other side

Governor Andrew Bailey and Chancellor John Healey published letters with the notice. Under the model, the DMO would buy the remaining sale-pool gilts at market prices and pass them to the National Loans Fund for cancellation. Treasury would instruct the DMO to issue a corresponding amount of debt through the annual financing remit. Healey wrote that overall gilt supply to the market from the public sector would be unchanged, but that the DMO would become the single public-sector supplier.

The Asset Purchase Facility is indemnified by the Treasury, so gains and losses on the gilts already sit with the government. Healey said those indemnity arrangements would continue unchanged. Bailey said the package preserves the independence of monetary policy; Healey restated that the separation of fiscal and monetary policy remains a feature of the UK’s framework.

Why the long end came out

UK term premia, the extra yield required to hold long-term government bonds, have risen by an estimated 200 basis points since quantitative tightening began in February 2022, the minutes said. Bank staff put QT itself at only about 20-30 basis points of that increase. The rest they attributed to global policy uncertainty, heavy government-bond issuance across countries, and structural changes in the UK market that reduced demand for long-term government debt.

Until the Bank decides whether the DMO is the buyer, it is not selling gilts into the market. The longest bonds are out of the sale pool.

Inflation at 3.1%, and three votes for 4%

Twelve-month CPI inflation was 3.1% in August, above the 2% target and far enough from it to trigger the separate open letters the Governor and Chancellor exchange when inflation misses by more than a percentage point. The committee voted 6-3 to hold Bank Rate, with Megan Greene, Catherine L. Mann and Huw Pill preferring a quarter-point increase to 4%. Those three argued that the Middle East conflict was still lifting energy and food prices, and that a rise in inflation into early 2027 would land as wage settlements are agreed. The six-member majority held at 3.75%, pointing to domestic activity and tight financial conditions even as they judged the risk of second-round effects, price rises feeding into wages and back into prices, to be growing.

After last week’s highs

On Thursday, September 10, Reuters reported that the 10-year gilt yield had jumped 10 basis points to 5.378%, its highest since July 2007, and that 20-year and 30-year yields had reached their highest since 1998, at 5.895% and 5.948%. This morning’s 8-basis-point decline in the 30-year is a reversal of a few days, not of that climb.

Sterling fell to $1.3346 after the decision. The sterling currency trust BFXB was at $128.26, down 0.34%, as of 11:46 a.m. ET. The rate hold and the slower QT path arrived a day after the Federal Reserve raised its target range by 25 basis points to 3.75%-4.00%. For a US-listed holder, the gilt move shows up, if at all, inside broad international bond funds, where Thursday’s gains were less than 1%.

The DMO’s calendar is unchanged

None of this, yet, is a smaller UK borrowing programme. The DMO’s April revision to the 2026-27 financing remit still plans £246.2 billion of gilt sales this fiscal year, with total financing of £251.2 billion. If the government-purchase model is adopted, those APF sales would sit inside the DMO remit rather than in the secondary market. Until that decision, the DMO still has to place its own issuance, and the 2035-2049 bucket is still scheduled to leave the Bank at £20 billion a year.