Bank of England to Begin Quantitative Tightening from Next Month 1st... Long-Term Bonds Over 20 Years Will Continue to Be Held

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The Bank of England (BOE), the central bank of the United Kingdom, will begin quantitative tightening starting next month on the 1st (local time), according to major foreign media reports on the 18th (local time). However, the BOE has decided not to sell long-term government bonds this year, which recently experienced a sharp price drop (interest rate rise) causing a margin call (additional collateral requirement) crisis for pension funds.

On the same day, the BOE issued a statement announcing that the start date for quantitative tightening will be postponed by one day from the 31st of this month. This is to avoid a clash with the government's fiscal plan announcement scheduled for the 31st. Thus, after two postponements, the BOE's quantitative tightening will begin on the 1st of next month.

The BOE originally planned to start quantitative tightening on the 6th of this month. However, after the government announced a large-scale tax cut plan on the 23rd of last month, concerns about government finances caused UK government bond yields to surge, leading the BOE to delay the start date to the 31st of this month.

The BOE stated that it plans to sell medium- and short-term government bonds, and that long-term government bonds with maturities of 20 years or more will not be sold. This is interpreted as an intention to prevent a margin call crisis for pension funds.

Following the announcement of the government's large-scale tax cut plan, long-term government bond yields soared, triggering a series of margin call crises for pension funds. Pension funds had pledged long-term government bonds as collateral and invested in derivatives, but as long-term bond yields surged?meaning the prices of the collateral long-term bonds plummeted?they were required to provide additional collateral. To respond to margin calls, pension funds sold government bonds, which led to a vicious cycle of rising bond yields.

The yield on 30-year government bonds was 3.78% on the 22nd of last month, just before the tax cut plan announcement, but surged to 4.99% on the 27th of last month after the announcement. Intraday, it even exceeded 5%. As the situation worsened, the BOE announced a plan to purchase ?65 billion worth of government bonds on the 28th of last month to stabilize the market. As of the 18th, the yield has stabilized at 4.30%, but it remains significantly higher compared to before the tax cut plan announcement.

John Cunliffe, Deputy Governor of the BOE, stated, "Financial markets may experience high volatility over the coming weeks," but added, "The risk of another sell-off has significantly decreased."

Since the global financial crisis, the BOE has acquired ?838 billion worth of government bonds through quantitative easing over more than a decade. When announcing the quantitative tightening policy earlier, the BOE stated it would dispose of a total of ?80 billion worth of government bonds over one year.

This content was produced with the assistance of AI translation services.