Line chart of percentage of UK gilts held by the three largest investor categories showing that Bank of England gilt holdings have surged during Covid-19

The Bank of England's holding of UK government debt has surpassed the two largest groups of private investors after policymakers accelerated debt purchases to bolster the economy against the blow from the pandemic.

The £741bn of gilts on the BoE’s books has surpassed the amount held by overseas investors and pension and insurance companies, the two largest groups of private lenders to the British government, according to the country’s Debt Management Office.

The central bank’s share of UK bonds pushed above 30 per cent at the most recent reading by the DMO, released at the end of last month and covering up to the end of September 2020.

“The speed of [the BoE’s gilt] build-up is pretty striking to put it mildly,” said John Wraith, head of UK rates strategy at UBS. He added that the bank was on course to own half the conventional gilts in issue by the end of the year, having started its gilt purchases in 2009.

The BoE’s rate-setting panel voted last month to maintain the pace of its bond-buying programme at £150bn this year. By the end of 2021, this quantitative easing programme would leave the BoE sitting on £895bn of assets accumulated since it initially began buying bonds in 2009, during the global financial crisis.

The growth in the BoE’s gilt holdings comes after the profile of UK debt holders had held relatively steady in recent years, with domestic savers the largest creditor to the UK followed by foreign investors — despite fears that Brexit would scare off these overseas buyers.

However, analysts warned that the BoE’s rising UK bonds share could put gilt prices under downward pressure when the bank’s support was withdrawn once the pandemic’s threat to the UK economy had eased.

Column chart of Supply of UK gilts net of BoE purchases, UBS forecast (£bn) showing Gilt supply forecast to jump next year

They predicted the bank would slow its weekly purchases at some point this year, and the BoE’s Monetary Policy Committee said it expected to complete the bond-buying programme “around the end” of this year.

The bank’s withdrawal of extra demand for UK bonds would probably come as the government plans to continue substantial borrowing to support the economic recovery from the pandemic, analysts noted.

The combination would push net supply of gilts to the highest level on record, according to UBS projections. From the next fiscal year, the amount of gilts available for private investors is forecast to push 30 per cent above the previous record level of net supply, set in 2010.

“Net issuance will need to be reflected in higher yields,” said Theo Chapsalis, head of UK rates strategy at NatWest Markets, referring to expectations that prices for the debt will fall.

“Once tapering kicks in, you will see another leg higher in yields.”

Daniela Russell, head of UK rates strategy at HSBC, said “supply matters on a day-to-day basis for bond yields but, longer-term, higher supply and more debt is not enough to justify higher yields.” She said expectations for the BoE’s interest rate policy was the key driver for markets.