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Unwinding £ Quantitative Easing: the BoE Should Sell Calls

Julian D. A. Wiseman

Abstract: Some possible means of unwinding quantitative easing could worsen market disruption. Selling gilts by selling short-dated call options would avoid this, and is easily done.


Publication history: only at Usual disclaimer and copyright terms apply.

Contents: Introduction (BoE holdings); Solution; Conclusion; Also See.

Quantitative Easing: Bank of England holdings
of gilts as of 4th February 2011 (source)
≈ Clean
≈ Set Totals
2013 Mar 07£6111mn£6483mnNom.: £46bn
Clean: £51bn

To be held
to maturity
2013 Sep 278%£1557mn£1815mn
2014 Mar 07£8232mn£8288mn
2014 Sep 075%£12716mn£13912mn
2015 Jan 22£415mn£419mn
2015 Sep 07£13159mn£14340mn
2015 Dec 078%£4296mn£5329mn
2016 Sep 074%£7430mn£7821mnNom.: £43bn
Clean: £47bn
2017 Aug 25£2871mn£3831mn
2018 Mar 075%£12320mn£13573mn
2019 Mar 07£7653mn£8104mn
2019 Sep 07£2199mn£2197mn
2020 Mar 07£10884mn£11654mn
2021 Jun 078%£11285mn£15172mnNom.: £45bn
Clean: £50bn
2022 Mar 074%£10812mn£10761mn
2025 Mar 075%£6957mn£7513mn
2027 Dec 07£9625mn£9483mn
2028 Dec 076%£6256mn£7518mn
2030 Dec 07£7242mn£7500mnNom.: £43bn
Clean: £42bn
2032 Jun 07£8922mn£8617mn
2034 Sep 07£3087mn£3063mn
2036 Mar 07£2160mn£2065mn
2038 Dec 07£6100mn£6317mn
2039 Sep 07£3026mn£2894mn
2042 Dec 07£1516mn£1512mn
2046 Dec 07£2183mn£2089mn
2049 Dec 07£2269mn£2178mn
2055 Dec 07£4906mn£4727mn
2060 Jan 224%£1549mn£1419mn


As part of the extraordinary monetary operations resulting from near-zero interest rates, the Bank of England has bought a large quantity of gilts (table on right), in total about £178bn nominal, currently worth about £190bn excluding accrued interest. At some stage, probably after the policy rate has been raised from its multi-century low of ½%, the gilts will need to be sold. How could this best be done?

The BoE’s desiderata should include the following.

But “disruption” is a broad term. It has been reported in the press that some hedge funds are shorting OATs, issued by France (rated AAA), in anticipation of a weakening of its creditworthiness. Could the same happen to the UK? Of course the Bank of England would insist that she is not expecting any weakening of the UK’s creditworthiness. But nonetheless, if the market should be pricing same—mistakenly of course—then the BoE should wish not to be worsening the market’s stress. So imagine that the BoE has a pre-announced calendar of gilt sales, and that about the time of a sale, gilts are weakening fast. Would the BoE wish to be selling into such a crash? Surely not. Would the BoE wish to be contributing to a possible sense of panic by cancelling an auction? Yikes! Both are bad.


There is a simple solution, which would work as follows.

This has the natural advantages of selling options. If the price is falling, the BoE would not be selling, in the sense that the options would not be exercised. Further, the dealers’ delta-hedging of these options would make them buyers as prices fall, and sellers as prices rise, a gentle stabilising effect. (The stabilising would be ‘gentle’ because there would typically be only £4.8bn of options outstanding.) Both of the these advantages happen automatically, under their own steam, without any need for further decision by the BoE.

Given the numbers above, each week’s operation would sell, from each set, an average of 50% × £400mn = £200mn. As of February 2011 the BoE owns about £44bn of each set, so selling the whole inventory would take something like 220 weeks, or about four years, plus or minus some months. If the Monetary Policy Committee should wish to act at a different pace, the “£400mn” could be changed, before or after starting.


Some possible means of unwinding quantitative easing could worsen market disruption. Selling gilts by selling short-dated call options would avoid this, and is easily done.

Also See

A similar suggestion—sell gilts by selling calls—has been made to the Debt Management Office: see Methods for Distributing Gilts (December 2008), a reply to a DMO consultation; and a presentation of the reply given at the DMO in February 2009. These discuss the legal form that options should take (listed mark-to-market derivatives), and the same arguments apply to a program of sales by the Bank of England.

— Julian D. A. Wiseman
6th February 2011

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