Why is the BoE doing this now?

[Nimrod103]

https://www.telegraph.co.uk/business/20 ... and-bonds/

Bank’s decision to sell bonds at a time when prices are potentially at their lowest adding to the losses

The Bank of England’s decision to sell-off government bonds is costing taxpayers £15bn a year and squeezing Jeremy Hunt’s room to cut taxes, a top investment bank has warned. Deutsche Bank said Threadneedle Street’s decision to reduce the size of its balance sheet by actively selling gilts bought during the pandemic, rather than letting them mature, meant taxpayers faced much heavier losses in the short term. Based on the current path of interest rates, taxpayers face £15bn-a year in extra losses compared to a scenario where the bonds just matured. The Treasury is on the hook to make the Bank whole on any losses from the bond-buying programme, known as quantitative easing (QE).

Sir John Redwood urged the Bank to stop actively selling bonds. He said: “They’re making a double mistake having given us inflation with too much quantitative easing (QE). Now they’re giving us too much austerity by doing too much QT, forcing interest rates too high and suffering heavier losses. “The Treasury, which is having to pay all these losses that we need not take, are then in no mood for tax cuts because they’re having sent so much money to the Bank of England.”

[Lootman]

Reminds me of Gordon Brown's decision to sell off much of our gold reserves at a cyclical low.

https://www.bullionbypost.co.uk/gold-ne ... ains-gold/

If public sector workers were good investors then they would not be public sector workers.

[1nvest]

Pre 2008 and UK debt was around £500Bn and costing 5% to service. The financial crisis had the BoE print £££'s to buy up those bonds whilst the treasury issued £1000Bn of new Gilts costing 2.5% to service. The interest the BoE receives from the Treasury for the £500Bn of Gilts it bought ... is returned to the Treasury. Was just a debt restructuring exercise, still costing the same to service, but spread out over more years (and more time for inflation to erode the real value). The debt is now around £2500Bn, of which the BoE holds around £1000Bn of that, so £1500Bn of actual debt after that is discounted, much of which was sold at 2.5% type interest rates, so comparable to £750Bn of pre 2008 debt (that cost 5% to service). 2008 to recent and inflation has compounded by 1.5x ... so we're little different to pre-financial-crisis in real terms.

When a big player starts selling bonds the tendency is for prices to decline, selective selling might help transition the current inverted yield curve to a more flatter or normal yield curve, that might avoid a otherwise recession. A inverted yield curve is indicative of greater risk in the shorter term, the selling is perhaps indicative that shorter term risks are looking to fade. Unlike the BoE returning interest on the Gilts it holds whoever buys those Gilts will expect the interest to be paid to them, so costs the Treasury more, which leaves less for spending elsewhere, which slows demand, that slows inflation (that otherwise is driven by higher demand than supply). Demand has remained relatively high, higher interest rates have had limited effect (many homes in the UK are owned outright rather than mortgaged), higher taxation it would seem is on the books, despite taxation already being at historic extremes.

[1nvest]

Reminds me of Gordon Brown's decision to sell off much of our gold reserves at a cyclical low.

https://www.bullionbypost.co.uk/gold-ne ... ains-gold/

If public sector workers were good investors then they would not be public sector workers.

Brown had to get the money to buy/support the Euro from somewhere. The UK paid on the way in, paid on the way out. Lousy negotiators that cost UK taxpayers dearly. A common re occurrence (Sunak threw money around freely, that subsequently was identified as being non-recoverable ... stupidity).

Gold had been in a 20 year decline and appeared to be dead, fiat reigned supreme, until as ever fiat faltered, as it always has and always will. Only the interval between 'corrections' is unknown.

Bear in mind the US owns all of the gold in the world - upon which the dollar is based. The 8000 tons of gold the US Treasury secured in the 1934 via compulsory purchase has subsequently seen non-redeemable bonds being issued against that gold to the Fed at $42.42/ounce. At $2000/ounce recent prices the Fed in effect has approaching 50x leverage, comparable to having 400,000 tons of gold, twice the amount of actual gold in the world. And the more the dollar might come under strain and see the price of gold rise, so the greater the leverage power the Fed has. The Fed in part peg the dollar to gold (peg gold to the dollar), but unlike in times of old where a precise peg was maintained nowadays its range bound/dynamic.

Whilst the UK own little of its own gold, it does vault much gold for others, around half the amount that the US holds. A remnant from when the UK was a centre of excellence for law, accounting, finance, better for smaller countries to employ/use that expertise than doing it all for themselves. The UK resists repatriation of that gold as it helps maintain global stability/capitalism, rather than seeing it lost to communism. Much of UK trade with the EU was .... gold and multiple-counted car parts (export a screw from NI to be packaged in Southern Ireland before being returned to NI again type import/export figures). London Loco gold bars are still one of the most respected, so raw gold comes in, London gold bars go out (often to Switzerland for onward transport to China).

Australia did have a pre-prepared law where it could confiscate all gold within its realm at a price it dictated at the time, literally upon a single signature - as a 'last resort' defensive measure. When you secure much gold for others as the UK does then there's less need to hold/own gold yourself. Canada no longer holds any gold, sold it all, but then they have much natural storage of its own gold, unextracted. Other countries have to have gold as a defence, but where that's best vaulted elsewhere such as if a coup occurs, and where the UK is commonly preferred for that (Singapore is on the rise, Switzerland is losing ground, the UK is increasingly being seen as no longer a center of expertise, quite the opposite). Absent that expertise and the UK becomes just a damp/cold/dark northerly bunch of European islands that owns little of its own gold. As part of the EU that was pretty much where the UK was headed, outside of the EU and the opportunities are great, but that currently lacks the political desire to pursue, instead Sunak/Cameron/etc. would rather the UK continued along its path of decline.

[Nimrod103]

Reminds me of Gordon Brown's decision to sell off much of our gold reserves at a cyclical low.

https://www.bullionbypost.co.uk/gold-ne ... ains-gold/

If public sector workers were good investors then they would not be public sector workers.

Brown had to get the money to buy/support the Euro from somewhere. ..............

Is this relevant to the thread title?


On totpic, the Daily Telegraph is on the subject again this morning:
https://www.telegraph.co.uk/business/20 ... -billions/

I can't reproduce the whole article, but I will quote a few things.
The cheap money illusion that will cost taxpayers billions for years to come
Only now is Britain experiencing the painful fallout of its quantitative easing addiction

Lord Macpherson, a permanent secretary to the Treasury at the time, says: “They wanted to take credit for the profits to show that borrowing was in fact lower.” It was a devil’s bargain. When QE had been agreed, Darling had promised the Government would pay for any losses incurred by the Bank on gilts in an effort to prevent a black hole on the central bank’s balance sheet that could skew decision making. By spending the QE gains when times were good, it only made it more painful to meet those losses when the economy turned. Lord Macpherson, who once compared QE to “heroin”, says: “That made it inevitable that you would have to pay for these losses later on. Had the ring fence remained in place, the losses now would be far more easy to absorb.” Profits would end up rising to £123.8bn at their peak in September 2022. By then, Osborne was long gone. His pledge to only spend QE gains on paying down debt had also fallen by the wayside.

While profits from QE peaked just over a year ago, the rapid rise in interest rates since then has brought with it an astonishingly fast change in fortunes for the Government. QE losses arise as the interest the Bank pays commercial lenders outstrips income from gilts, or as bonds are sold at a loss. The Treasury is on the hook to make up the difference – and it must pay up in short order. It has transferred £29.1bn to the Bank over the past year alone.
Deutsche Bank notes that “no other major central bank has had to register such losses as direct and immediate consequences to the public finances”.

Deutsche Bank argues that the Bank could limit these losses by being more selective about the bonds it sells. At the moment, it follows a rigid rule of thumb where sales are split evenly between short, medium and long term debt. Insiders say an analysis published in December by Deutsche Bank pointing out the design flaws of QT has caught the Treasury’s eye and officials have been asking questions about how the scheme can deliver better value for money.

I despair of the suggestion in the last sentence that the BoE didn't realise the implications of what they are doing until Deutsche Bank pointed it out to them. This has the elements of a major policy blunder (another one).

[scotview]

rather than letting them mature, meant taxpayers faced much heavier losses in the short term.

I believe the Fed is letting their's mature.

[88V8]

https://www.telegraph.co.uk/business/2023/11/16/jeremy-hunt-tax-cuts-autumn-statement-bank-england-bonds/
Bank’s decision to sell bonds at a time when prices are potentially at their lowest adding to the losses

No no, it's a cunning plan... they can offset the losses against CGT

V8

[Ashfordian]

https://www.telegraph.co.uk/business/2023/11/16/jeremy-hunt-tax-cuts-autumn-statement-bank-england-bonds/

Bank’s decision to sell bonds at a time when prices are potentially at their lowest adding to the losses

The Bank of England’s decision to sell-off government bonds is costing taxpayers £15bn a year

Just another cost of our overreaction to Covid to add to the already long list.

The £400bn+ debt racked up by our overreaction is already costing the taxpayer £20bn+ a year to service. I wonder how may lives could be saved or suffering reduced if we had a large chunk of that £20bn to put to work on the NHS waiting lists!

[dealtn]

This looks like a misunderstanding of what is meant by "cost" - although I haven't jumped through a payroll to read the source article.

The central bank is tasked with monetary policy, and normally this is just through setting an interest rate. Due to the weakness previously and the zero rate bound this meant that once rates were that low, in order to loosen policy further, since negative interest rates were impractical, they bought Gilts to introduce more money into the system.

So fast forward and unusually in a tightening cycle the central bank, tasked by the MPC, now has choices regarding tightening. Raise interest rates, or sell back Gilts (or both). So if the MPC decides to do the latter, it is an alternative to raising interest rates. So that "cost" of selling the Gilts at a loss (and even then this isn't necessarily a loss depending on the accounting methodology and when this is taken) needs offsetting against the "gain" in the interest cost of an otherwise lower interest rate for the (huge) borrowing the Government is undertaking in the Gilt market.

[Nimrod103]

This looks like a misunderstanding of what is meant by "cost" - although I haven't jumped through a payroll to read the source article.

The central bank is tasked with monetary policy, and normally this is just through setting an interest rate. Due to the weakness previously and the zero rate bound this meant that once rates were that low, in order to loosen policy further, since negative interest rates were impractical, they bought Gilts to introduce more money into the system.

So fast forward and unusually in a tightening cycle the central bank, tasked by the MPC, now has choices regarding tightening. Raise interest rates, or sell back Gilts (or both). So if the MPC decides to do the latter, it is an alternative to raising interest rates. So that "cost" of selling the Gilts at a loss (and even then this isn't necessarily a loss depending on the accounting methodology and when this is taken) needs offsetting against the "gain" in the interest cost of an otherwise lower interest rate for the (huge) borrowing the Government is undertaking in the Gilt market.

All above my pay grade I'm afraid, but I thought the issue at stake was that the BoE was choosing to sell long dated gilts which incurred the highest losses, rather than selling short dated gilts in preference, which would incur lower losses. Is there a reason for this behaviour other than 'Well, that's the way we have always done it'.