The Bank of England faces an increasingly difficult decision over quantitative tightening (QT) as UK borrowing costs reach their highest levels in years. Ten-year gilt yields climbed to 5.41% this week, while 30-year yields approached 5.93%, reflecting a broader global bond sell-off driven by inflation concerns, fears over sovereign debt sustainability and higher corporate borrowing in debt capital markets. Against this backdrop, the Bank must decide whether continuing to sell government bonds risks adding further pressure to already elevated gilt yields.

QT involves reducing the Bank’s balance sheet by allowing gilts to mature without reinvestment (passive) and selling bonds into the market (active version), reversing the quantitative easing (QE) programme that accumulated £895bn of assets between 2009 and 2021. Although the Bank estimates that QT has added only 20 to 30 basis points to 10Y gilt yields since 2022, external estimates suggest the impact could be considerably larger, particularly from active sales. With the Treasury already facing higher debt-servicing costs, further upward pressure on yields could therefore increase the government’s borrowing burden.

Nevertheless, abruptly halting QT could create a different set of problems by undermining the Bank’s commitment to a gradual and predictable reduction in its balance sheet, potentially unsettling investors and raising concerns over political influence on monetary policy. Markets currently expect the Bank to reduce the annual pace of QT from around £75bn to approximately £50bn, providing some relief without abandoning the programme entirely. The dilemma illustrates the difficult legacy of unconventional monetary policy: after QE helped suppress borrowing costs (as increased central bank demand inflated bond prices, leading to lower yields), reversing it now risks making government financing more expensive precisely when fiscal pressures are already mounting.

- Muthu Ramanathan

JPMorgan is set to launch a new bond index tracking approximately $330bn of local-currency government debt across 26 frontier economies, with African countries accounting for almost 45% of its weighting. Egypt, Morocco and Nigeria are expected to receive some of the largest allocations, while Angola, Zambia, Kenya and Namibia are also set to feature. The benchmark could give African debt greater visibility among international investors, potentially increasing demand for local-currency bonds and improving access to international capital markets.

The attraction is partly the returns on offer: the index is expected to carry an average nominal yield of 10.4%, around 4.4 percentage points above JPMorgan’s mainstream emerging-market local-currency bond index. Such yields reflect both the opportunity and the risks facing frontier markets, where higher inflation, volatile currencies and less liquid financial markets can generate significant losses for foreign investors despite attractive interest payments. A sharp depreciation against the dollar, for instance, could substantially erode international investors' returns.

For African governments, sustained inclusion could help deepen domestic bond markets and diversify financing away from foreign-currency debt. Borrowing in local currencies reduces the risk that a weaker exchange rate increases the domestic cost of servicing dollar-denominated liabilities, while greater international participation could improve liquidity. However, inclusion does not mean that $330bn of capital will flow into Africa, as actual inflows depend on investor allocations. The index is therefore more than a benchmark: if it attracts durable foreign demand, it could strengthen African capital markets, but if inflows prove volatile, it could instead amplify the very currency and financing risks it seeks to reduce.

- Neev Dave

Canadian Prime Minister Mark Carney is seeking to position Canada as a “safe harbour” for global capital as its trade relationship with the US deteriorates. At an investment summit in Toronto, Carney is courting more than 100 investors representing over C$120tn in assets, with the government targeting C$1tn of new investment over the next five years across defence, energy, mining, artificial intelligence and infrastructure. The strategy reflects a broader attempt to reduce Canada’s dependence on its largest trading partner by attracting capital from Europe, Asia and the Middle East.

Canada’s appeal rests on its political stability, natural resources and established financial markets. At the same time, Carney’s background in global finance, following his tenure at Goldman Sachs, gives him relationships with many of the investors he is targeting. The government is also seeking to expand private-sector involvement in infrastructure, announcing plans to privatise operations at four major airports while retaining public ownership of the underlying assets. Such measures could unlock capital for infrastructure investment while signalling a broader shift towards market-led development.

However, attracting investment will require more than showcasing Canada’s assets. Investors face lengthy approval processes, regulatory barriers, tax competitiveness concerns and shortages of skilled labour, all of which can delay projects and reduce expected returns. The deterioration in US-Canada trade also creates uncertainty, particularly given that exports to the US are equivalent to around 20% of Canadian GDP. Until Canada establishes a more predictable trading relationship with its largest economic partner, investors may remain cautious about committing capital for the long term.

Carney is therefore attempting to transform Canada’s geopolitical vulnerability into an investment advantage, but the strategy will ultimately be judged by whether investor interest translates into actual projects. His ability to attract global financiers may open the door to new capital, yet faster approvals, competitive regulation and stable trade relationships will determine whether Canada can genuinely become a global investment hub rather than simply a temporary alternative to the US.

- Muthu Ramanathan

Until next time,

The Long and Short

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