(Bloomberg) -- The Bank of England sold £750 million ($860 million) worth of UK government bonds from its quantitative-easing portfolio for the first time on Tuesday, as the once-largest buyer of gilts looks to trim its mammoth holdings.

The central bank said it received £2.44 billion of bids for the various short-maturity gilts it put up for sale, a bid-to-cover ratio of 3.26. The bonds are from the BOE’s asset-purchase facility, which accumulated close to £900 billion in government debt at its peak last December. 

The move is aimed at reversing the QE program that helped prop up the economy through the global financial crisis and the pandemic. Under the program, the BOE bought bonds in financial markets to push interest rates to near zero, hoping that easier money would give investors confidence and help foster growth.

While QE kept a lid on market interest rates, Governor Andrew Bailey hopes that its reverse, dubbed quantitative tightening, can run in the background and leave the focus on the BOE’s benchmark lending rate as the main tool of managing monetary policy. 

So far, that’s working. Gilts extended gains later in the afternoon as traders pared bets on future rate hikes, pricing interest rates to peak above 4.75% next year. The UK five-year yields last traded at 3.48%, down 13 basis points.

“With short maturity bonds holding up well versus their long-end peers, the sales do not appear to have experienced many hiccups,” said Pooja Kumra, a rates strategist at Toronto-Dominion Bank.

Read more: BOE to Take Historic Step in Unwinding £838 Billion Stimulus 

Excess Supply

The BOE started paring back its government bond holdings in February when it agreed to allow maturing debt to roll off the balance sheet instead of being replaced. While the US Federal Reserve is doing the same, it hasn’t pursued active sales yet. 

The experiment comes at a delicate moment for the Treasury and BOE. Once the BOE’s planned sales are added to the government’s financing needs, investors will have to absorb the largest supply of UK bonds in history, according to the nation’s debt chief. 

What’s more, only weeks ago the central bank was buying bonds under its financial-stability mandate to tame a disorderly selloff, with those securities held in a separate portfolio from its main gilt fund. The impacts of that chaos still linger, with the BOE excluding longer maturities from its active QT plans for now. 

“The risk that the BOE faces is that QT is beginning at a time when there is going to be an increase in supply given the fiscal measures that have been announced,” Imogen Bachra, head of UK rates strategy at NatWest Markets, told Bloomberg Television. 

The BOE’s £750 million of sales Tuesday will wipe a larger amount off its balance sheet. This is due to the difference between between the nominal value of the bonds and the price at which the BOE sold them. 

Selling at a lower price also crystallizes losses for the government, which is financially responsible for the portfolio. The loss to the Treasury on Tuesday’s auction alone was about £90 million, according to Bloomberg calculations.

Read more: UK Treasury to Transfer £11 Billion to BOE to Cover QE Losses

The BOE is hoping to reduce its holdings by £80 billion in the next year. That will include about £35 billion of redemptions, leaving about £45 billion of reduction via sales. At current prices, that will mean active sales of less than £40 billion, with the government making up the rest of the shortfall.

The BOE’s decision is actively sell its gilt holdings contrasts to the European Central Bank’s approach, widely expected to be done on a passive basis and which is not expected to start until 2023 at the earliest to avoid roiling fragile markets. Still, Tuesday’s outcome showed that active sales can be achieved with minimal disruption. 

“That’s what the BOE wants - it should be like watching paint dry,” said Hank Calenti, fixed-income strategist at SMBC Nikko Capital Markets Ltd.

--With assistance from David Goodman and James Hirai.

(Updates throughout.)

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