21 August 2026: QT is not about to end

Quantitative Easing is not yet ending, but markets increasingly expect the Bank of England to slow or partially halt QT, especially long-dated gilt sales, as the programme is putting visible strain on the gilt market.

Investors surveyed by the Bank expect balance-sheet reduction to slow to £50bn over the 12 months to September 2027, down from £70bn in the current year. The Bank has sold only £4bn of its £150bn+ long-dated gilt holdings in the past year. At this pace, unwinding them would take almost 25 years, meaning that to all intents and purposes, the sales have ended.

Meanwhile, weak demand and 30-year yields hitting 5.87% have forced the BoE to shift sales towards shorter maturities.

Large bond investors anticipate the BoE may slow or halt long-dated gilt sales to avoid destabilising a fragile part of the curve. The Bank’s reserves have fallen to £643.5bn, still well above the BoE’s preferred range of £365–£515bn, but the gap is narrowing. At the current pace (~£63bn per year), reserves could hit the upper bound within two years, which would naturally force QT to slow.

Andy Burnham faces serious economic challenges a month into his premiership, with experts warning that tackling the cost of living, reviving weak growth, and restoring the country’s strained public finances will be key to delivering on his domestic agenda.

It has been a month, give or take, since Burnham officially became prime minister, with his pledges focusing on cost-of-living relief, devolving power from Westminster, and bringing essential services under public control.

However, experts have warned that obstacles such as post-Brexit economic challenges and the complex domestic agenda he inherited could make it difficult for him to deliver on his goals.

In an interview, Patrick Diamond, a professor of public policy at Queen Mary University of London, said that cutting VAT on energy bills and lowering public transport prices has been a positive start to bring down the cost of living. Still, far more needs to be done, possibly before the new Chancellor John Healey delivers his budget in less than ten weeks.

Reiterating the economy as the biggest obstacle for the new premier, Diamond underlined that post-Brexit, the UK economy is weak and the UK’s fiscal position has markedly deteriorated.

He went on to say that the economy is not growing above 1.5%, which is "not enough to support the welfare state and public services."

"Any government in Britain is constrained in what it can do due to that underlying economic weakness," he added.

For Diamond, the cost of living is a good place for Burnham to start as an immediate priority to build public confidence. However, he said the Government must also show it can improve competitiveness and make the private sector work more efficiently by reducing red tape and making it easier to start and grow a business.

It is not enough to redistribute the cake more fairly; it is essential also to make the cake bigger.

Even if artificial intelligence boosts productivity, it may not lower inflation, warned the International Monetary Fund's new chief economist, Silvana Tenreyro, in research published yesterday by Bank of England staff. Tenreyro is a former independent member of the Bank’s Monetary Policy Committee.

At first glance, higher productivity, meaning more output from the same inputs, appears to lead to lower prices.

Federal Reserve Chair Kevin Warsh has said he hopes the rollout of artificial intelligence will allow the U.S. economy to grow faster without causing higher inflation. But Tenreyro, in an article co-written with a BoE economist, said the inflation impact of highly anticipated productivity gains was ambiguous.

"Business investment and household spending can both move ahead of realised productivity gains, as many argue is happening now with investment in AI infrastructure," the article said.

If investment demand, or spending in anticipation of future gains from AI, comes before the economy has actually seen the promised productivity improvement, it can lead to supply crunches, push up inflation, and require higher interest rates, the analysis said.

The pound strengthened yesterday, driven primarily by broad US-dollar weakness rather than UK-specific news. Across the major crosses, GBP gained against the USD, fell against the EUR, and was mixed against other G20 currencies.

Federal Reserve Bank of San Francisco President Mary Daly has suggested the US Treasury market signals that monetary policy is in a good place right now.

“There’s a lot of discussion about our credibility there. I don’t see our credibility at risk,” Daly said yesterday in a Bloomberg Television interview. “I also hear a lot about whether we should be making pre-emptive cuts, or hikes, rather? And I don’t see much evidence of an urgent problem to solve.”

Investors have sold bonds aggressively since the Fed’s last meeting in July, when officials left interest rates unchanged for a fifth straight time and didn’t signal that a rate hike was imminent. The selloff has been most pronounced in longer-dated securities, with 30-year bond yields surging to their highest levels since 2007. The selloff reflects concerns about rising US debt and inflation that has remained above the Fed’s 2% target for more than five years.

Meanwhile, Treasury Secretary Scott Bessent is in the midst of a historic effort to tamp down long-term Treasury yields. He may also be complicating matters for the Federal Reserve.

Earlier this week, the Treasury Department said it would increase its buybacks of long-term Treasury debt, raising the maximum it will buy from $2 billion to at least $4 billion. The intervention stemmed a sell-off in the Treasury market that had pushed yields to uncomfortable levels in recent days.

The sell-off had dominated global headlines as investors worried that rising Treasury yields would worsen an affordability crisis for consumers, complicate businesses’ borrowing plans, threaten stock-market gains and make it more expensive for the government to finance its burgeoning debt.

While the buybacks aren’t large compared with the total amount of debt outstanding, many in the markets interpreted the Treasury’s new repurchase plan as a potent symbol of Bessent’s long-standing effort to bring down the yield on the 10-year Treasury and other maturities.

President Trump has demanded that the Fed cut interest rates to ease the burden of financing the Federal Debt, even as the debt continues to grow. The Federal Budget deficit is on track to reach $2.1 trillion this year, according to the Congressional Budget Office.

That will distort markets and make life harder for Kevin Warsh.

Treasury buybacks are formally aimed at improving market liquidity for less-traded instruments, in other words, ensuring that there are enough buyers and sellers in a given market to establish reliable prices. In this case, the Treasury aimed to take longer-term maturities, of 10 to 30 years, off the market.

The US economy is performing worse than it did when President Joe Biden left office last year, according to Peter Schiff, Chief Economist at Euro Pacific Asset Management.

He criticised both the Biden and Trump administrations for worsening economic conditions, highlighting rising inflation and a national debt that has surpassed $40 trillion. Schiff warned of ongoing stagflation and a looming sovereign debt crisis, urging investors to buy gold and diversify internationally to protect against a weakening dollar. He also said political challenges may block necessary economic reforms and warned of the risk of a Democratic socialist winning the 2028 Presidency.

The dollar had a very weak session yesterday, falling sharply across major FX pairs as long-term US yields dropped after a surprise Treasury buyback announcement. This was a broad, policy-driven sell-off, not data-driven, and pushed the dollar index to a three-month low.

Eurozone construction output fell 0.7% year on year in June 2026, reversing a downwardly revised 0.7% increase in May.

The decline was driven mainly by continued weakness in building construction, which contracted 6.5%, though the pace eased from 7.5% the previous month.

Growth also slowed sharply in civil engineering (0.3% vs 3.5%) and specialised construction activities (0.2% vs 2.4%).

Construction activity fell most sharply in France (-4.5% vs -0.7%) and Belgium (-4.1% vs 1.8%), while output in Spain declined 8.5%, easing from a 12.8% contraction in May.

Monthly, construction output fell 1.3%, reversing a 0.2% increase in May.

After returning from the annual August Vacation, it may be significant that the ECB President headed to the World Economic Forum headquarters to deliver her first speech back.

The World Economic Forum is still courting Christine Lagarde to become its next chair, according to several sources.

The issue was reportedly discussed at a meeting of the organisation’s board this week.

It is strongly rumoured that the European Central Bank head appears ready to take the role, even as she stresses that she wants to take an active role in next year’s French Presidential Election. However, Lagarde wants to be sure tensions between the WEF and its founder and former chairman, Klaus Schwab, have been fully resolved, according to one source.

The ECB declined to comment, and a WEF spokesperson said it doesn’t comment on confidential board meetings.

Lagarde has long been closely linked to the WEF role, an idea that’s been heightened since Schwab’s abrupt departure in April 2025. Schwab left amid an investigation into alleged financial misconduct. He was cleared of any wrongdoing, though the strains between the two parties have lingered.

The queue to replace Lagarde at the ECB is growing, with former Governors of national central banks Pablo Hernández de Cos and Klaas Knot at its head, joined by current Bundesbank Governor Joachim Nagel.

With U.S. and European stocks hitting record highs as investors pour money into artificial intelligence, economists at the European Central Bank warn that the current rally could eventually give way to a sharp market correction, even if AI delivers the productivity gains investors expect.

“Economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely,” the economists wrote.

They outlined two possible paths to such a correction. In the first, investors become overly optimistic about AI's commercial potential, pushing share prices above companies’ underlying earnings prospects. Once expectations begin to weaken, the resulting reversal could trigger a sharp selloff.

The second scenario is more significant because it does not depend on an outright AI failure. Even if current valuations accurately anticipate substantial improvements in productivity and corporate profits, economists note that stock prices could still fall as investors better understand the technology's risks.

The euro had a strong session yesterday, rising sharply against the US dollar and gaining modestly across most major FX pairs. The move was driven almost entirely by broad USD weakness after the US Treasury announced expanded long‑dated bond buybacks, which pushed US yields lower and lifted EUR/USD.

Have a great day!