Reports indicate that the Bank of England is preparing to suspend sales of its 20-year and 30-year government bond holdings as part of a comprehensive overhaul of its quantitative tightening programme.

According to sources familiar with the matter, officials from the Bank of England, HM Treasury, and the Debt Management Office (DMO) have drafted proposals for the change, though the final decision rests with the central bank. The announcement could come as early as Thursday alongside the Monetary Policy Committee's rate decision, with the adjustment arriving against a backdrop of long-term gilt yields surging to multi-decade highs.

Britain's 30-year yield currently sits above 5.9%, a level not seen since the 1990s, while prices for 20-year and 30-year gilts fell last week to their lowest since 1998.

Why the most aggressive balance sheet shrinker is pumping the brakes

The Bank of England has pursued the most aggressive quantitative tightening programme among G7 nations, and is the only major central bank actively selling bonds into the market before they mature. Since 2009, it has accumulated as much as £895 billion in bond holdings through quantitative easing; that portfolio has now been reduced to approximately £490 billion, of which around £150 billion consists of long-dated gilts with maturities exceeding 20 years.

Market participants anticipate the Bank will slow the pace of quantitative tightening to roughly £50 billion per year over the twelve months beginning in October, down from £70 billion in the previous two years and £100 billion the year before that. This implies active sales of around £20 billion annually. However, long-dated bonds account for only about 20% of the current active sales programme, meaning even under a steady pace and structure, actual disposals of this portion would amount to just £4 billion.

Mike Bell, market strategy head at RBC BlueBay Asset Management, expects the Bank to shift sales toward shorter and medium maturities, adding that "a complete halt to long-dated bond sales would not be surprising."

In fact, the slowdown has already been underway: over the past year, the Bank has sold only about £4 billion from its £150 billion long-dated holdings, mostly concentrated in two ultra-long bonds. At this pace, a full exit would take more than 24 years. In the last quarter's auction schedule, the number of gilt auctions with maturities beyond 20 years dropped to zero for the first time since the active sales programme began in January 2023.

Tomasz Wieladek, chief European macro strategist at T. Rowe Price, argues that a neutral and prudent approach would naturally entail reducing or even halting long-dated gilt sales, given the structural decline in demand from pension funds for these securities.

The bill for 'selling at half price'

The core issue lies in losses. The Bank of England purchased bonds heavily when prices were high, and is now selling them at depressed levels. Deutsche Bank analysts estimate that the average discount on long-dated bonds sold through quantitative tightening is roughly 50%.

Economists broadly agree that rapid long-dated bond sales since 2022 have cost UK taxpayers approximately £22 billion. The Office for Budget Responsibility projects that fully liquidating the portfolio over the next five years would cost around £100 billion in total.

Should long-dated sales be halted, the Bank's active disposal programme would continue at roughly £20 billion per year, but would be entirely stripped of long-duration debt. Instead, the central bank would sell its holdings of short and medium-term gilts directly to the DMO to help smooth additional government debt supply pressures. This "New Zealand model" was discussed as early as 2022 but shelved over concerns about undermining monetary policy independence.

Compared with maintaining the current pace of sales, halting long-dated bond sales is expected to save the Treasury approximately £2.5 billion per year before the end of this decade, providing valuable fiscal headroom for new Chancellor John Healey ahead of his first Budget on October 28.

Yet there is a clear flip side: stopping sales of loss-making bonds means the Bank retains more reserves on its balance sheet, requiring the Treasury to pay more interest on them. This could complicate Healey's ability to meet the fiscal rule of balancing day-to-day spending with revenues.

Bank of England Governor Andrew Bailey has repeatedly defended the existing sales strategy, insisting that an immediate halt would merely force unavoidable losses to be spread over a longer period.

Thursday's decision: rates on hold, a divided committee

Markets are now focused on Thursday's Monetary Policy Committee meeting, with broad expectations that the Bank will keep interest rates unchanged at around 3.75%. Bailey pushed back last week in parliamentary testimony against the notion that further rate hikes were "inevitable."

However, the committee is likely to deliver a split vote, and investors will be closely watching the number of dissenting votes.

The week brings dense UK data: Wednesday sees August inflation figures, while Tuesday's employment report was mixed. The ILO unemployment rate for the three months to July held steady at 4.9% (versus expectations of a rise to 5%), but claimant counts rose by 27,800, more than three times expectations.

The shadow of rate hikes has not dissipated. UK petrol and diesel prices have risen to their highest since 2022, driven by oil price increases amid the Iran conflict, prompting markets to price in four rate hikes by the Bank of England next year. Goldman Sachs turned hawkish on Monday, forecasting a 25 basis point hike in November, with Citi joining the hawkish camp the same day. UBS expects Thursday to deliver a "hawkish hold."