Blain’s Morning Porridge 16^th, Sept 2026 – Bond fears, and why slowing UK QT makes sense

“Gilts are dull, boring and predicable, but utterly terrify markets when they move a fraction of basis point.”

Global Bond yields remain… fragile. As the US breaches 5% 10-year yields, the UK is now slowing QT which should be market positive. It’s high time the Bank of England and the UK Treasury (which famously pretend the other doesn’t exist) cooperate on liability management to address the UK’s debt pile – which is actually in much better shape than the right-wing press would have you believe.

An Apology: Yesterday we had a IOS problem. “Idiot on Seat” – I forgot to switch on the microphone recording the Morning Porridge podcast. I only found out on the train! Therefore, two Podcasts today:

Links to Podcast:

15^th Sept – What Chance of European Growth

16^th Sept – Bond Fears, and why slowing UK QT makes sense

Key Takeaways:

• The global bond selloff hit a worrying tidemark yesterday as the US 10-year Treasury hit 5%. Shock, horror… mass panic? Nope – Normalisation.
• The Bank of England spotted the kerfuffle in bonds – and are doing the right thing by slowing QT.
• The key issue for bond markets is how QT impacts demand/supply pricing. At current rates QT was about 22% of the size of new UK debt issuance. That’s had a significant negative impact in terms of the higher yields on Gilts.
• The UK’s debt position isn’t as bad as other nations – its’ longer debt profile means less to refinance each year. Cutting competing supply will ease prices further.
• Slowing QT will not create a sudden bull market, but will ease the pressure from energy costs, slowing trade, rising inflation, conflict risks and unsustainable government deficits. (It might even shut the Torygraph up for a while…)
• The UK’s Treasury and The Bank should cooperate to abandon QT completely and embrace liability management of the UK’s debt pile.
• Zonk Theory – replacing the Bank’s Portfolio with a Zero-Coupon Perpetual “Zonk” could reduce the UK’s outstanding debt, avoid crystalised losses from QT and further lower debt costs…

As predicted, US 10-year Treasury yields broke through 5% last night. I am intrigued to see who Scotty Bessent blames it on. Zelensky? The Mekon?

Meanwhile, the Bank of England is about to slow its Quantitative Tightening programme. It will announce changes to its bond selling programme – and will stop selling the longer-dated 20-year plus Gilts in its inventory, which will ease some of the pressure at the long-end. As the planned changes worked round the market yesterday UK 10-year gilts rallied from 5.375% to 5.31% at one stage! Joy unlimited.

Changing the approach to QT should improve sentiment towards Gilts! Not exactly a bull market as trade, inflation and conflict risks escalate, but its looks like some common-sense discussions have been held.

At one point The Bank held an £875 bln Gilts Portfolio. (Today it holds around £490 bln.) The Bank actively bought bonds from the market, injecting liquidity and keeping yields low, from March 2009, briefly accelerating the programme during Covid, before ending it in late 2021. The Bank began passive QT (selling the bonds back into the market) in 2022 and then actively selling the portfolio from later that year. (Almost immediately, the Bank had to reverse QT and buy more bonds to stem the market’s extraordinary losses in the wake of Liz Truss torching the whole Gilts market through her ill-advised budget, which ended her brief spell as Premier in No 10.)

While I understand how QE works in terms of interest rate repression and QT in rate normalisation – I really struggled with the Bank of England’s logic in selling mature bonds when there is no pressing need to do so.

QE is a proven strategy for keeping rates low, but it has consequences. It was non-inflationary in 2009-22 because inflation was limited, and China was exporting deflation around the globe. Today… very different. And QT makes a bad situation in bonds (struggling to find buyers as inflation threats mount) even worse because it raises selling pressure.

Through the last 2 years the Gilts market has been under considerable external political pressure. There has been a blitzkrieg of negativity – especially in the UK Right Wing press – about bonds. They repeatedly cited threat of the bond market selling off due to Sir Keir Starmer’s policies (such as they might have been) and frequently were frontpage headlines in the Torygraph and on GB News.

There were multiple lurid tales about the UK about to go cap in hand for a bailout from the IMF, or the imminent collapse of society on the back of higher yields. It was all absolute nonsense, but it kept the readership scared and fulfilled the press-baron’s goal of making the government look bad. My mother-in-law became an overnight authority on the bond market through reading the Torygraph – and frequently explained to me just how Starmer and Rachel Reeves were destroying the nation. I love her to bits… but.

The stories and other misinformation contributed greatly to the sense of fear that “Bond Vigilantes” would sink gilts because of bad government policy. The bond market became the bogeyman which left the government looking not unlike the proverbial headless chicken.

The reality is very different.

I’ve worked in bond markets for 40 years. I have never met a bond vigilante. I have met many brilliant traders and investors who understand the realities of the prompt repayment of interest and principal, the effect on inflation on bonds, the demand/supply equation, and how political decisions may impact these. The story that Bond Vigilantes are poised to punish governments accountable for every decision they make – is a fabrication for scaring the children… but it’s a useful way to undermine political opponents… “The Bond Market won’t like it.”

The critical thing is demand and supply. Over the last year the Bank of England has sold some £70 bln of its QE Gilts portfolio back into the market. Meanwhile, the UK Treasury, acting through the Debt Management Office, raised some £310 bln of new funding for the government. Effectively that meant £380 bln of Gilts sold into the market – about 10% of the UK’s outstanding debt. (That’s a great number btw, other nations have to refinance much larger parts of their outstanding debt every year because the average duration of their debt is shorter – the USA has to cycle about 30% of its debt every year!)

If you increase supply of any good or commodity by 22%, that’s bound to negatively impact the price of that good. The Bank and The Treasury were both competing for the same buyers at a time when buyers are scarce because of rising global inflation!

You have to question the logic of selling these Gilts through QT. The Bank acquired its Gilt Portfolio between 2009-2022. During that time the average yield on 20-30 debt issued by the government was around 2.5%. Think about that… it means the UK was paying 2.5% per annum to borrow money for 30-years. Today it would pay around 5.93% to raise similar 30-year debt (which it has stopped doing)! That means for the next 13-26 years, the government will only be paying 2.5% for the long debt held by The Bank. The amount will reduce as bonds mature (unlike bond traders – old City joke) and repay.

When some Right-Wing journalist tells you that 30-year interest rates are now 6%, therefore the UK is paying £180 bln on its £3 trillion debt every year… they are talking bollchocks. The actual rate is far less and depends on what rate the debt was issued at. Any smart company would use liability management techniques to ensure they are paying the least amount of interest possible on their debt pile – and managing outstanding debt is part of that.

Government doesn’t work that way. The UK Treasury is the liability side of the Government balance sheet. It seeks to borrow money at the lowest rate possible – which is done by the excellent Debt Management Office. The Bank is independent, but in this case is the asset side of the same national balance sheet. While interest rates are high it makes sense for the Bank to hold longer-dated bonds to keep the debt service cost to the nation low, and to avoid realising a loss when they sell the bond. (That is because bond prices and yields are the inverse of each other: interest rates rise and bond prices fall… its maths!)

When the Bank sells the QT bonds into the market it doesn’t change the rate the Treasury is paying on the original bonds to the next buyer, but it will push up the yield on the next bonds it sells – simple demand/supply.

I have often proposed what I call Zonk Theory. Rather than the Bank of England selling the bonds back to the market, it would accept a Single Small Coin with £490 bln written on one side, and the Kings head on the other. The coin would remain an asset of the Bank at full face value of the Gilts, but would be a zero coupon, perpetual liability of the Treasury… the actual real effect would be to reduce the amount of Gilts by about 17%. The Bank would have to accept its Zonk was no longer a liquid asset as Gilts, but a full faith and credit obligation of the UK government in perpetuity… its call financial engineering or liability management…

Out of time and back to the day job…

Bill Blain

Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital

Meanwhile, don’t forget about my new book: The Battle for Hamble

You can read a review on the Society of Professional Economist’s website here.