The Bank of England should broaden the range of bonds it sells in order to boost market liquidity when it lays out plans to scale back the size of its balance sheet next week, investors say.Over the past two and a half years the BoE has shrunk its gilts portfolio — which was swelled by numerous rounds of quantitative easing stimulus — from nearly £875bn to £688bn. Unlike other central banks, it is not just waiting for bonds to mature but is also actively selling them.
Investors worry that poor liquidity in the short-dated gilts market could create problems in the repo market, where high-quality collateral such as gilts is temporarily exchanged for cash. The repo market is usually used by the central bank to help set its official interest rate, but investors worry that yields may be suppressed if demand for short-dated assets outstrips supply.