The Bank of England has surpassed the two largest private investor groups in terms of UK government debt. This is due to the fact that the regulator has increased the purchase of securities in order to support the economy in a pandemic.
According to the Debt Management Agency (DMO) of the Bank of England, £ 741 billion of government securities on the Bank of England’s balance sheet surpassed the holdings of foreign investors, pension and insurance companies – two of the largest groups of private creditors of the British government.
In the latest DMO report, released late last month and covering the period to the end of September 2020, the central bank’s share of UK bonds exceeded 30%.
“The speed of increasing volumes [государственных ценных бумаг Банка Англии]is amazing, to put it mildly, ”said UBS’s John Wraith.
He also added that the bank, which began purchasing in 2009, will own half of ordinary government securities by the end of the year.
The Bank of England’s rate-setting commission last month voted to keep the pace of its bond buying program at £ 150bn this year. By the end of 2021, as a result of this quantitative easing program, the Bank of England will have accumulated £ 895bn in assets since it began buying bonds in 2009 during the global financial crisis.
The rise in the Bank of England’s government securities reserves came as the profile of UK debt holders has remained relatively stable in recent years, and domestic depositors have been the UK’s largest creditor, with foreign investors following, despite fears that Brexit will scare off overseas buyers.
However, analysts warned that the growing share of British bonds in the Bank of England could put downward pressure on the price of government securities, once the threat to the British economy from the pandemic weakened and the central bank withdrew support.
They predicted that the bank would cut its weekly purchases at some point this year, and the Bank of England’s Monetary Policy Committee said it expects the bond purchase program to be completed “around the end” of this year.
Analysts also noted that the bank is likely to give up on stimulating demand for British bonds. Meanwhile, the government has no plans to cut borrowing to support the economic recovery after the pandemic. As a result, UBS predicts that the net supply of government securities will reach the highest level on record. According to some estimates, starting next fiscal year, the volume of government securities available to private investors will grow by 30% from the previous record level of net supply set in 2010.
“The net issue will be reflected in the growth of yields,” said Theo Chapsalis of NatWest Markets, referring to expectations of a fall in the cost of debt. “As soon as the contraction starts, the profitability will rise again.”
Daniela Russell of HSBC said that “daily supply matters for bond yields, but in the long term, the increase in supply and debt growth is not enough to justify higher yields.” She added that expectations for the Bank of England’s interest rate policy are a key factor for the markets.