Bond navigators: The Bank of England's changing quantitative tightening plan and the gilt market

The Bank of England’s revised quantitative-tightening plan improves the relative case for extending gilt duration as rate hikes are already largely priced and longer yields remain near cycle highs.

• On 17 September, the BoE kept Bank Rate at 3.75% by a six-to-three vote, while acknowledging stronger-than-expected growth and signs of labour-market stabilisation.
• Elevated oil and natural-gas prices, alongside potential weather effects on food prices, led the BoE to raise its expected inflation peak to just above 4% in the first quarter of next year.
• Markets were pricing an approximately 80% probability of a 25-basis-point hike in November and three further hikes next year, taking Bank Rate to 4.75%; earlier in the week, around five hikes had been priced, implying a possible 5% peak.
• The BoE permanently scrapped active sales of UK gilts maturing beyond 2049 and suspended all active bond sales until April 2027, when new operational details will be announced.
• Longer-maturity bonds then materially outperformed along the curve, while Royal London Asset Management continued to see value in three- to seven-year gilts and judged the market’s implied rate path too high.

Takeaway: With curves steep, yields close to their cycle peaks and policymakers appearing willing to limit pressure on long-dated gilt yields, investors should consider rotating from shorter to longer maturities, although the view remains exposed to inflation and future rate-policy changes.