As the Governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.
This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.
In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.
On 28 September, the Bank of England’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.These purchases will be strictly time limited. They are intended to tackle a specific problem in the long-dated government bond market.
Auctions will take place from today until 14 October. The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.The Monetary Policy Committee has been informed of these temporary and targeted financial stability operations. This is in line with the Concordat governing the MPC’s engagement with the Bank’s Executive regarding balance sheet operations.
As set out in the Governor’s statement on Monday, the MPC will make a full assessment of recent macroeconomic developments at its next scheduled meeting and act accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.
The MPC’s annual target of an £80bn stock reduction is unaffected and unchanged. In light of current market conditions, the Bank’s Executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter.The Bank will shortly publish a market notice outlining operational details.
This Market Notice sets out details of the Bank’s temporary purchases of long-dated UK government bonds from 28 September 2022.
As set out in the accompanying press notice, in line with the Bank of England’s financial stability objective, the Bank will carry out purchases of long dated gilts in a temporary and targeted way. The purpose of these purchases is to restore orderly market conditions.
Given current market conditions, the Bank stands ready to purchase conventional gilts with a residual maturity of more than 20 years in the secondary market, initially at a rate of up to £5 billion per auction. These parameters will be kept under review in light of prevailing market conditions.
The remainder of this Market Notice sets out the arrangements that apply to these gilt purchases. The Market Notice may be supplemented and refined further over time. The Bank retains the discretion to alter any of the terms below at any time.
Timing and frequency of operations
The first auction will be conducted on Wednesday 28 September between 3pm – 3.30pm.
Subsequent auctions will be conducted on each week day from 28 September 2022 to 14 October 2022, between 2.15pm – 2.45pm.
The auction schedule will be kept under review, and details of each auction will be confirmed by the Bank on its wire services pages.
Instrument eligibility will be kept under review.
The Bank will purchase conventional gilts of residual maturity greater than 20 years in the secondary market.
Eligible instruments will be subject to exclusion criteria. In particular, the Bank will not offer to purchase gilts newly issued by the UK Debt Management Office (DMO) within one week of their issue; and will not offer to purchase gilts which the DMO has announced it will re-open, including via a mini-tender, during the one week before and after re-opening.
In addition, the Bank does not intend to purchase gilts where it holds more than 70% of the free-float, i.e. the total amount in issue minus government holdings.
Form of operation
The Bank will offer to purchase gilts in a competitive reverse-auction. In each auction, the Bank will offer to purchase up to a fixed total value of gilts, based on total proceeds, including any accrued interest. The initial size of each auction will be up to £5 billion. This will be kept under review in light of prevailing market conditions.
Reflecting that the objective of these purchases is to support gilt market functioning as a backstop, the Bank will set reserve prices, and other auction parameters, consistent with this. The amount of each stock that the Bank will buy in each auction will therefore not be pre-determined. Offers for different stocks will be allocated based on the attractiveness of offers for each stock relative to market mid yields for the stocks, as published by Tradeweb, at the close of the auction. There will be no minimum allocation to a particular stock.
Auctions will be held using the Bank’s electronic tendering system, Btender. The Bank reserves the right to restrict the number and/or the timing of offers submitted by counterparties who do not have access to Btender.
Counterparties must input the nominal sterling amount in millions for each specific gilt they wish to sell and the clean price they wish to offer.
The number of decimal places allowed for the price is currently 3.
Offers are submitted by counterparties using a clean price. When offers are received in Btender they are also converted to a yield using the standard gilt market conversion calculation available on the DMO’s website, and the yield is also displayed for information to counterparties.
The minimum offer amount and increment are currently set at £5 million and £1 million respectively.
The Bank will not restrict the maximum total value of gilts for purchase from a single counterparty in each auction.
The Bank reserves the right to reject offers, in whole or in part, including in light of other offers received; and reserves the right to set a maximum offer price/minimum yield.
Offers will be allocated in descending yield order, based on the attractiveness of offers for different stocks relative to market yields. Offers that are accepted at the lowest yield may be scaled down on a pro rata basis and will be rounded down to the nearest allocation increment, currently set at £0.1 million.
Offers are accepted in full or in part at the counterparty’s offer price. The amount of each accepted offer in total proceeds will be paid to the counterparty.
The Bank reserves the right to cancel an auction at any time before the results are published. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a subsequent day.
Confirmation of the amount allocated in the auction will be available in Btender. Gilt purchases will normally settle on a T+1 basis. All counterparties must comply with the Settlement procedures outlined in the APF Purchase Operating Procedures.
Aggregate results will be announced after each operation and published on the Bank’s website.
Gilt purchases for the purposes of financial stability will be financed by central bank reserves.
Only firms that are participants in the Bank’s gilt-purchase Open Market Operations (OMOs), and are also Gilt-edged Market Makers (GEMMs) as listed on the website of the DMO, are eligible counterparties for these auctions. Counterparties that are already participants in the Asset Purchase Facility (APF) and that participate in an auction are deemed to have accepted the terms set out this and any other relevant Market Notices. Their Admission Letters under the APF are deemed to be amended to admit them into these gilt market operations. Documentation under the APF will apply to all these gilt operations and this Market Notice forms part of such Documentation.
The gilts purchased announced today will be conducted within BEAPFF. BEAPFF is indemnified by HMT. These purchases will be segregated in a different portfolio from existing asset purchases in due course.
Source: Bank of England
— Berenberg Economics (@Berenberg_Econ) September 28, 2022
Mike Owens, Global Sales Trader at Saxo Markets, said in an email to Markets Media: “This move from the Bank of England won’t stem moves against the UK debt and currency markets on their own. It’s a narrowly defined intervention that hopes to dampen the current shocks. We’re told that the Bank is meeting with the Treasury routinely week-on-week, and so now the focus will swing back to how the government plan to convince the market that their expansionist policy will provide the growth necessary to balance the UK’s finances.”