The Bank of England is still wrong to take big losses selling gilts in the market
By johnredwood on August 23, 2026
I have long argued the Bank of England should stop selling long bonds in the market, taking big losses and sending Treasury and taxpayers the bill. I was pleased to see an article in yesterday’s Telegraph going over this old ground again. It does need a new push with a new Chancellor, who could persuade the Governor to change this damaging policy.
Labour had no criticism of the Bank’s decision to announce a major sale of bonds at the time of the Truss budget,. They watched the predictable big sell of in bonds, then saw the Bank reverse its policy, announce temporary buying of bonds and watched as the market rallied strongly. They never objected to the huge losses the Bank recorded from end 2022 onwards both by selling bonds at big losses in the market which were needless and by having to accept smaller losses on bonds as they matured, all covered by taxpayers and the Treasury.
Now the new Chancellor should think again. He should ask the Governor why he still thinks it a good idea to lose well over £200 bn on bonds from Q3 2022 to the end of the bond programme and seek to persuade him in private that a change of policy is needed. No other Central Bank is behaving like this. The losses can and should be reduced.Taxpayers deserve a break from the Bank’s extreme policy.
I have written about it many times from 2022 onwards. Here are two takes from this site:
10 June 2025
The first thing to do is for the Chancellor to tell the Bank she will not pay for any more losses from selling bonds in the market. No other central bank does this. There is no stated good purpose for the policy.The Chancellor’s permission was needed for the purchase, and the Treasury guarantees against loss.This gives her the right to order a stop to sales.
The second is to raise with the Bank the running losses where the Bank spends far more on interest on commercial bank deposits than it receives in interest on the bonds which were bought at very high prices when interest rates were much lower. The ECB for example pays a lower rate of interest on its deposits than its lending rate . The Bank of England has the same rate for lending and borrowing. The Bank could require a minimum level of reserve deposits by commercial banks at zero interest.
Some suggest paying nothing on any of the deposits. This has not been tried in recent years when these much larger deposits have built up. The ECB got away with reducing the interest it pays. Markets might be more alarmed by the sudden withdrawal of all interest payments to banks. There could also be a knock on effect on bank lending and growth from the sudden sharp reduction in bank profits and cashflow. Better to proceed with more prudent steps to carry markets with you.
And
Bank of England losses
OCTOBER 28, 2024
Amidst the many figures and forecasts in the March budget there was one that stood out which got too little attention. The Official figures said the Bank of England’s bond buying which had sent the Treasury £124 bn of profits in the early years will end in overall loss of £104 bn when they have finished their fire sale and run off of the bonds. That is a hidden way of saying they plan to lose £228 bn on bonds from Q3 2022 onwards. Taxpayers have so far had to stump up £49 bn of this loss by March 2024, with more big bills this year.
This whopping increase in public spending goes undiscussed in Parliament now I have stood down. The last Chancellor wrote a letter saying this is a real cost to the public sector which reduces scope for other spending and or leads to higher taxes. The Bank of England for its part denies that selling all these bonds at low prices is important to its monetary policy. It wants us to believe these sales do not depress bond prices and therefore push up interest rates. The time when they first announced a major programme of £ 80 bn of sales was the start of the big autumn 2022 bond sell off, when the news coincided with a rate hike and triggered the LDI problems.
No other Central Bank thinks it clever to incur big losses by selling bonds they paid too much for at depressed prices they help create by the sales. No other central Bank sends a huge bill to taxpayers. Why do we put up with this? Why do we pay the Governor more than £500,000 a year for being the world’s worst large scale bond trader, presenting us, the taxpayers, with a forecast £228 bn bill?
Today:
It is high time the Bank took its selling pressure off a worried gilt market, and high time the Treasury was spared yet more and bigger bills for these avoidable and needless losses from sales in the market. The Bank’s big bond experiment is proving far too expensive and far from helpful.
Why are government bonds in disarray?
By johnredwood on August 22, 2026
As someone who studies bonds and sometimes writes about them I dread the times when they become leading news items. It is usually for a bad reason. Markets can get in a panic if governments issue too much debt or if inflation takes off, hitting the value of the bonds and the interest they pay the saver. It leads to a lot of fevered and often badly informed commentary on the media, as the media accept the credentials of some "experts" who struggle to explain a bond in simple language or in some cases struggle to understand the bond themselves.
A bond is a government debt. Many governments like the UK and US borrow large sums from the banks, pension funds, insurance companies and the investing public. They do so by issuing a large new debt for anyone to buy a small portion of the new big loan. The buyer gets an electronic certificate that they have bought a share of the debt which states how much interest they will get on their investment, and when they will get their money back. The UK government will borrow the money for a specified time period with a fixed repayment date (the duration of the loan) and will guarantee to pay a fixed rate of interest every six months throughout the duration of the bond. Inflation linked bonds are different.
These bonds are a convenient way for funds and savers to invest. They know exactly what rate of interest they will get, like making a fixed rate savings deposit with a bank. They know exactly when they will be repaid. More importantly, they know that if their circumstances change and they need to get their money back in a hurry, they can sell their bond to someone else in the market any time it is open. So far so good.
The catch is if you do need to sell before the repayment date, you might not get back the amount you paid the government in the first place, or the amount you paid to buy the bond in the market. If interest rates go up in the meantime the value of your bond in the market goes down, as people will want to get a higher income on your bond than you are getting. They can only do this by paying you less for the bond than the original issue price because the amount of interest paid is fixed. The interest paid is then a higher percentage of their cost of the bond than it was of your original cost of the bond. A bond with no repayment date (like a stock with a very distant repayment date) issued with a promise to pay 1% interest annually will halve if the interest rate goes up to 2%, as the £1 guaranteed interest stays the same so to get 2% on that bond you can only afford to pay £50 for £100 of the original issue. £1 interest is 1% of £100 and 2% of £50.
Where I often part company with the commentariat is when I hear them say these government bonds are safe assets. If you or your pension fund had bought the UK government's 0.5% 2061 bond at issue you would be sitting now on a 77.5% loss on your original purchase price. So if you had bought £100 worth you could sell it today for just £22.40. These longer dated government loans or bonds are highly volatile. Before covid the Bank of England and the UK government issued a lot of debt at very low interest rates with repayment dates many years ahead. Once interest rates started going up to deal with a bad inflation, you were bound to lose a lot of money if holding these investments. It is true that if you wait until 2061 you will get your money back, but in the meantime you will only be getting an unacceptably low 0.5% on your money when a savings deposit or a shorter dated government bond would pay several times that. If you own the 4.25% UK gilt repaying in December next year you can sell your £100 worth of that for £100 today, or hold and enjoy the 4.25% annual interest for the remaining year and bit when the government sends your £100 back.
It is true that a government bond from a reliable state like the UK or US is safer than some corporate bonds issued by some companies. They might go bust, or get into financial difficulties so they delay or cut the interest payments. The US and UK have met all their interest payments in the past and are very likely to continue to do so. That has not been true of all other governments with some failing to meet payments when they have got into financial difficulties. Germany signed a 1953 Debt Agreement cutting some of its debt obligation by agreement with its creditors. Brazil reneged on some debts in 1987. Since 2020 Sri Lanka, Argentina, Ghana, Zambia, Ecuador, Ethiopia and Lebanon have all defaulted or suspended some payments on debts.
It is untrue to say that any government bond with a very distant repayment date is "safe". In times like today those bonds will sell off to low prices. They can be ravaged by inflation at any point in their long lives. Both the US and UK governments are having to pay a much higher rate of interest on their borrowings today than at any time this century. That is because they have already borrowed too much and are refusing to rein in their high levels of new borrowing which places more strains on a reluctant bond market. The danger is a doom loop, where higher interest rates drive up the amount government has to pay in interest charges on its debts, which in turn worry the markets as these could become unaffordable.