The Bank of England on Monday bought just £22mn of bonds under its operation to soothe strains in the gilt market, in the latest sign that the central bank has so far succeeded in halting a chaotic sell-off without spending anywhere near its maximum £5bn daily purchases.
The daily purchases were launched last Wednesday as a slump in long-dated gilts threatened to spiral out of control, sparking a liquidity crisis among UK pension funds. Over the first four days of the 13-day programme, the BoE has spent just £3.66bn of a possible £20bn, meaning the purchases are likely to end up falling far short of the potential £65bn size.
Monday’s operation, in which the BoE rejected offers from investors who sought to sell £1.89bn of gilts, followed a gilt rally driven by the UK government’s U-turn on plans to scrap the top rate of income tax.
“This is the BoE sending a message that if it doesn’t look like we’re still in the middle of a crisis, they will be careful about how much they spend,” said Rohan Khanna, a rates strategist at UBS.
Monday’s smaller than expected purchases triggered further sharp moves in 30-year gilts. Yields rose from the day’s low of less than 3.7 per cent to almost 3.99 per cent, slightly higher on the day but far below the level of more than 5 per cent last week that triggered the BoE intervention.
Starting with Tuesday’s buyback, the BoE has asked gilt dealers to identify whether offers to sell bonds have been made on behalf of clients or for the banks themselves. In a market notice published on Monday, the central bank said it was “studying patterns of demand . . . in order to ensure the backstop objective of the tool is delivered”.
The notice, along with Monday’s small-scale buying, was likely to be a sign that the BoE is sensitive to accusations that it has in effect restarted quantitative easing and wants to ensure that the market intervention is properly targeted at stresses in the pensions sector, according to ING rates strategist Antoine Bouvet.
“It shows the BoE is sensitive to criticisms that this policy is counterproductive in their fight against inflation,” Bouvet said. “They want to demonstrate that they’re not just going to bite investors’ hands off at any price.
Investors are already contemplating what will happen after the scheduled end of purchases on October 14. The fact that 30-year bond yields are now below those on shorter-term debt suggested long-end yields were likely to rise once more without BoE support, Khanna said.
He added: “What the BoE may be doing today is a kind of test case to see what happens if they step away. If yields go up, they won’t have a problem, as long as it’s not too fast or too disorderly.”
However, some investors think the BoE will have to prolong its purchases in order to prevent further turmoil in the gilt market.
“I would suspect most gilt market participants have a base case that the buying won’t end as scheduled, or that if it does, the BoE will be forced to return,” said James Athey, a portfolio manager at Abrdn.