Bank of England Pauses Gilt Sales, Sparking Sharp Bond Rally

British government bonds staged a sharp rally on Thursday after the Bank of England announced it would pause active debt sales and stop selling longer-dated gilts altogether, easing pressure on a market that has been swept up in a global selloff.

The central bank's Monetary Policy Committee voted 6-3 to keep interest rates at 3.75%, matching analyst expectations. Policymakers also signalled that inflation is likely to exceed 4% next year, with Governor Andrew Bailey warning that a prolonged conflict in the Middle East could require higher borrowing costs.

Markets, however, focused on the BoE's plan for its nearly £500 billion ($670 billion) bond portfolio. The bank said it would halt sales until April and end disposals of long-dated bonds entirely.

Longer-dated gilts led the rally. The 30-year yield was on course for its biggest daily drop since May, falling 12 basis points to 5.74%, after touching 5.96% earlier in the week — its highest level since 1998. Yields move inversely to prices. The benchmark 10-year yield fell 8 basis points, while the rate-sensitive 2-year yield dropped 6 basis points.

"Reducing gilt sales and then abolishing them totally for the long-end is absolutely a positive," said Mohit Kumar, chief European economist at Jefferies, adding that the move had changed the supply-demand picture, particularly for longer-dated gilts.

The BoE has been the only major central bank actively selling bonds as part of a broad unwinding of crisis-era purchases. Critics, including some British political parties, have argued the sales unnecessarily added to pressure on gilts, though the central bank has estimated the impact as small.

The bond rally was helped by a drop in oil prices after reports of additional Saudi crude cargoes through Oman eased some supply concerns. Still, investors said energy prices would remain the dominant force in bond markets.

"I think we have bigger factors at play – mainly the uncertainty around energy prices," said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho. "The developments in the energy space, and whether that feeds into inflation, will ultimately dictate whether yields will move higher or not."

Laura Cooper, head of macro credit at Nuveen, called the pause "a step in the right direction" but said greater fiscal clarity was needed. "I think we need to see greater clarity on the fiscal front and the degree of what will come through in the budget for us to have conviction that some of that risk premium can start to fade in the long-term tenors," she said.

New Prime Minister Andy Burnham and finance minister John Healey will present their first budget in October, with limited room to manoeuvre after the recent rise in government borrowing costs.

Traders continued to fully price in a BoE rate hike this year, seeing a November increase as a 75% possibility and pencilling in almost four 25-basis-point rises by money markets by the end of 2027. The decision followed a U.S. Federal Reserve rate hike a day earlier and a European Central Bank increase a week before. The pound slipped slightly, while the FTSE 100 held on to earlier gains.