The fire sale of UK assets sparked by Chancellor of the Exchequer Kwasi Kwarteng’s mini-budget last week has pushed the market losses on the Bank of England’s government bond portfolio to more than £200 billion ($216 billion).
The shortfall reflects the difference between what the BOE paid for gilts during the 2008 financial crisis, after the Brexit vote, and when the pandemic hit, versus the current market price.
The collapse comes just a week before the BOE plans to begin unwinding its quantitative easing program by selling gilts, meaning the losses will start to be crystallized. The first sale is scheduled for next week, with a £40 billion target over the following 12 months.
The bonds were already underwater, but Kwarteng’s fiscal statement, in which he unveiled the biggest tax cuts in half a century but offered little detail on how to control the national debt, triggered a market rout. That sell-off continued Monday, when sterling crashed to an all-time low against the dollar and gilt prices tumbled.
The price of the benchmark 10-year government bond has fallen 7.8% in the past week and about 24% over the past year. Bond prices fall when yields rise, and the latter are heading higher on expectations of further sharp interest-rate hikes. Markets believe BOE rates could rise above 6%.
The BOE bought £875 billion of government bonds between 2009 and 2021 but has since reduced the portfolio to £838 billion by retiring bonds as they mature. On current market prices, the portfolio is worth about £620 billion, calculations by Bloomberg using BOE data show.
The market value does not reflect the net coupon income that the BOE has made from the portfolio since 2009, which totals about £120 billion so far -- all of which has been transferred to the Treasury.
With interest rates at current levels of 2.25% or higher, the net income flow from the portfolio will end.
©2022 Bloomberg L.P.