The Bank of England made a profit of about £3.5 billion on September’s emergency bond market intervention after selling off the final bonds on Thursday.
(Bloomberg) — The Bank of England made a profit of about £3.5 billion on September’s emergency bond market intervention after selling off the final bonds on Thursday.
The central bank bought almost £19.3 billion of long-term government debt following then-Prime Minister Liz Truss’s disastrous budget last year. The BOE stepped in to prevent a shock in the gilt market from turning into an economic crisis.
The purchases were made in just over two weeks through the middle of October, and sales began on Nov. 29. On Thursday, the BOE said sales were completed.
Buyers paid a total of about £22.8 billion, bagging the BOE a £3.5 billion gain – an 18% return.
The BOE intervened in late September to stabilize core markets as liability driven investment funds dumped around £70 billion of gilts to raise cash to meet margin calls. The sell-off caused a spike in yields that caused mortgage rates to jump over 6%.
It was the first test of the BOE’s emergency market-maker-of-last-resort facility, a version of its financial stability bail-out arrangement for banks under which it buys assets to stabilize prices.
The speed of the unwind testified to its success. The BOE said the sales had not disrupted the market, a sign that confidence in UK assets is stabilizing after the panic last year.
“The gilts in this portfolio were made available to interested buyers via reverse enquiry windows,” the BOE said in a statement Thursday. “This approach helped ensure that the unwind was responsive to market demand and did not trigger renewed dysfunction.”
The profit booked on the gilts stands in marked contrast to its formal quantitative easing program, under which the BOE bought £875 billion of gilts between 2009 and 2021 as part of monetary policy aimed at limiting interest rates in financial markets.
Those gilt holdings also are now being sold off and are carrying well over £100 billion of losses. The Treasury last year cleared an £11 billion transfer to the BOE to cover potential losses as QE is unwound under the indemnity it provided in 2009.
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