United StatesLike many other central banks, the Bank of England accumulated a vast stock of government debt in the decade or so following the global financial crisis. Uniquely, though, the UK’s central bank has been gradually selling these bonds – and doing so at a loss.
At a time when global bond yields are elevated and the UK’s long-term fiscal strength is under particular scrutiny, this policy of ‘quantitative tightening’ (QT) has contributed to rising UK government bond (gilt) yields. Sterling may only play a minor role these days as a global reserve currency, but the unique treatment of gilt sales and associated monetisation of losses is instructive for central bankers and fixed income investors globally.
From QE to QT
In 2009, the Bank of England established the Asset Purchase Facility (APF) as part of its quantitative easing (QE) programme. The APF primarily bought UK gilts, injecting liquidity into the market and lowering the government’s long-term borrowing costs to support spending.
After another surge in gilt purchases during the pandemic, when tax receipts collapsed, the APF grew to £875bn, equivalent to roughly 30% of UK GDP.1
In early 2022, the Bank of England became the first major central bank to start selling government debt bought under QE back to the market, rather than simply letting bonds mature and not reinvesting the proceeds. This reversal of QE, known as quantitative tightening (QT), has coincided with a steep rise in 10-year gilt yields from roughly 1% to more than 4%.2
Source: Office for National Statistics / Bank of England / Bloomberg, February 2025
Subhead: Bank of England net asset purchases (£bn) vs 10-year UK government bond yields (%)
Overview: This line chart compares the cumulative value of UK government bonds (gilts) acquired by the Bank of England under quantitative easing with the yields on 10-year UK government bonds, between late 2008 and the end of 2024.
Overall, this chart shows the inverse relationship between net purchases of UK government bonds and gilt yields. 10-year gilt yields trended downwards from 2009 to 2020. Since the Bank of England began actively selling down its gilts, in 2021, 10-year gilt yields have risen from roughly 1% to above 4%.
The financial impact of QT
The Bank of England temporarily paused its QT programme and started buying gilts again following the ‘mini budget’ of late 2022, which disrupted UK pension funds and the gilt market, but quickly resumed at a pace of £100bn per year. Helpfully though, the current 12-month APF reduction is skewed towards bond maturities, with £87bn from maturing gilts and £13bn from active sales.3
The UK’s policy carries a cost in the current context of higher gilt yields. Selling gilts at much lower prices than they were originally purchased could incur losses, estimated by the UK’s Office for Budget Responsibility (OBR) to exceed £100bn.4 Since the Treasury covers losses incurred by QT, UK taxpayers will ultimately shoulder the cost.
Some argue that bond losses should sit on the Bank of England’s balance sheet as deferred assets to be recapitalised or offset by future profits. While the UK’s approach is transparent, it is stricter than other central banks’ approaches and, perhaps crucially, limits the government’s fiscal headroom.
The UK’s fiscal predicament
Recent economic data points to a softening UK economy. This would negatively impact tax revenues and, in turn, the budget deficit which was 4.8% of GDP in 2023/24 and expected to only slightly improve in the current fiscal year.5
Notably, the Bank of England (BoE) recently revised down its growth forecast for the UK to 0.75% in 2025, below the 2% predicted by the OBR.6 Retail sales have contracted, with household consumption constrained by the high cost of living, fuelled by rising bills and energy costs. Business investment fell by 3.2% in the fourth quarter with confidence taking a hit following the government’s decision to increase employer national insurance in late 2024.7 The prospect of US tariffs poses a further headwind for businesses. Meanwhile, recently announced plans to build 1.5mm new homes, a third runway at Heathrow and create an Oxford-Cambridge growth corridor do little to address immediate challenges.
This makes us more cautious about the OBR’s new growth forecast, which is due to be published on 26 March. Given limited fiscal headroom and Labour’s manifesto pledge not to raise income tax, VAT, or national insurance paid by workers, further tax rises and/or spending cuts seem unavoidable. UK inflation meanwhile remains stubbornly high, increasing the likelihood of low growth with higher levels of inflation, or ’stagflation’.
The UK economy also faces three major structural challenges. First, poor productivity. Output per hour worked has practically flatlined since the global financial crisis.8 Post-pandemic economic inactivity among older adults and higher energy costs have left productivity growth at 0.1%, well below the OBR’s forecast of 1% to 1.2% by 2029.9
Second, demographic trends remain unfavourable even with sustained net migration. As the dependency ratio rises, a costly healthcare and welfare bill underpins consistent budget deficits.
Third, the twin fiscal and current account deficits. The last government budget surplus was in 2000/01.10 Meanwhile the UK has sustained current account deficits since the 1980s, driven by a persistent trade imbalance in goods and recently by a dependence on energy imports.11
These issues are clearly not new, but the UK chancellor’s tight fiscal rules and increased taxes on businesses have spooked investors, causing gilt yields to rise to levels not seen since before the financial crisis.
The outlook for gilts
Turmoil in the UK gilt market has drawn comparisons with previous sell-offs including the 1976 sterling crisis, the 1992 forced exit from the European exchange rate mechanism, the 2016 Brexit vote, and the 2022 ‘mini-budget’.
The recent spike in yields might be less dramatic than those episodes, but it may not have run its course. The outlook for longer-dated gilt yields is closely related to the UK’s fiscal outlook and the ability of the government to restore investor confidence. Structural problems within the UK economy suggest that faster growth will likely be hard to come by, given fiscal constraints. The gilt market also remains exposed to external factors, not least US interest rates.
Crucially, it also depends on the trajectory of the Bank of England’s QT policy. By stopping or limiting gilt sales by the APF, it would align itself more closely with the European Central Bank and the US Federal Reserve, both of which have avoided direct bond sales.
The impact on gilt markets of putting QE into reverse holds lessons for other central banks that are weighing up options for their books of government bonds. Almost two decades on from the financial crisis, the effects of QE continue to shape fixed income markets.
1 Office for National Statistics / Bank of England / Bloomberg, February 2025
2 Bloomberg, February 2025
3 Office for Budget Responsibility, October 2024: Economic and fiscal outlook
4 Office for Budget Responsibility, October 2024: Economic and fiscal outlook
5 UK Parliament, 17 January 2025: The budget deficit
6 Bank of England, February 2025: Monetary Policy Report
7 Office for National Statistics, February 2025: Business investment in the UK: October to December 2024 provisional results
8 London School of Economics and Political Science, 2023: Chronic under-investment has led to productivity slowdown in the UK
9 Office for National Statistics, February 2025: Productivity flash estimate and overview, UK: October to December 2024 and July to September 2024
10 UK Parliament, 17 January 2025: The budget deficit
11 Office for National Statistics, December 2024: Balance of payments, UK
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