Market Flux Event
Bank of England Scraps Long-Dated Gilt Sales as Food Prices Threaten Fresh Bond Market Pain
Read this in the Market Flux appThe Bank of England announced it will halt active sales of its longest-dated gilts and redirect those holdings to be run down to maturity, a significant shift in its quantitative tightening strategy that sent UK bond prices sharply higher on September 17. The MPC, which held its benchmark rate at 3.75% in a 6-3 vote, set out a multi-year path to reduce its Asset Purchase Facility holdings to zero through annual sales of just 20 billion pounds alongside maturing bonds. Under the new framework, 222 billion pounds of gilts maturing before 2035 will be held to maturity, and 120 billion pounds of the longest-dated gilts, including all bonds maturing after 2049, will also remain in the APF indefinitely.
The BOE pivot comes amid already-strained conditions in global fixed income. Bond markets sold off sharply in recent weeks as investors priced in a more persistent inflation outlook, driven first by energy prices and now by growing concern over food costs. Analysts point to the risk that a Super El Nino, tight fertilizer supplies, shipping disruptions, and Europe's record hot summer will drive staple food prices higher, adding a second inflation shock even as central banks are still fighting the first.
Fed Chair Kevin Warsh raised rates unanimously at the Fed's September meeting, though President Trump told reporters he had spoken to Warsh just before the vote and described the board as "tough," saying interest rates are too high. Trump said the US should be paying the lowest interest rates in the world and that he wants Warsh to be independent, even as he publicly pushed back on current policy.
Elsewhere in global markets, Goldman Sachs noted that bonds provide a larger but still relatively small buffer against equity drawdowns, particularly given elevated inflation. China cut its US Treasury holdings to an 18-year low in July, a second consecutive monthly decline, adding to concerns about demand for US government debt. Oil in Shanghai hit a record $129 a barrel as Chinese refiners scrambled for supply amid Middle East disruption, though global crude prices eased somewhat after reports that Saudi Arabia was seeking to restore roughly half of its cross-country pipeline capacity within days following last week's drone attacks.
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Sources
- ZSchneeweissFood prices present fresh risk for global bonds after selloff
- MikeZaccardiGS: US bonds recently had one of the worst 5-year rolling nominal and real returns in a century In real terms, they were nearly as bad as after WW1 and WW2 and in the 1970s
- ZerohedgeTop Overnight News Trump told reporters that Fed Chair Warsh has a tough board and that he was standing by Warsh,and that he spoke to him just before the central bank unanimously voted to raise interest rates. “I’m relying on Kevin. But he has a very tough board"; he stated that interest rates are too high and not appropriate. Trump said they should be paying the lowest interest rates in the world and noted that inflation is too high. Furthermore, Trump stated he told Warsh to do what he wants and that he wants Warsh to be independent: WSJ Oil prices fell on Wednesday after reports that Saudi Arabia was offering additional crude cargoes through Oman eased some concerns about Middle East supply disruptions, while a smaller-than-expected draw in U.S. crude inventories added further downward pressure. RTRS Saudi Arabia is seeking to return about half the capacity of its cross-country oil pipeline within days after the link was halted last week following drone attacks. BBG Iran vowed to respond to a U.S. blockade by pushing more trade overland. On the ground, it isn’t going according to plan. WSJ Oil prices in China have jumped to record highs, as refiners in the world’s biggest crude importer step up a hunt for supplies amid widening fears over the security of exports from the Middle East. Oil futures in Shanghai were trading at $129 a barrel on Wednesday, above their peak of $121.80 in the first weeks of the Iran war. FT China cut its holdings of US Treasuries to an 18-year low in July, as overall holdings by foreign countries fell for a second consecutive month amid deepening worries over the sustainability of American government debt. SCMP Congress approved a bill giving Trump new powers to impose additional 100% tariffs on the five biggest importers of Russian oil or natural gas. The measure now goes to the president for his signature. BBG The BOE holds interest rates at 3.75% in a 6-3 vote, all as expected. BBG Mark Carney called for a closer alliance between Canada and the EU, risking a deeper rift with Trump, who threatened “very serious” tariffs or trade curbs over the bloc’s push to make Canada an associate member. BBG US Senators have reportedly secured an antitrust exemption for AI companies in the defense policy legislation before negotiations over the measure were delayed: Semafor. BofA Institute (w/e Sep 12) Total Card Spending +5.8% Y/Y (prev. +7.8%). Says K-shaped spending looks increasingly like a stale narrative.