Updated: Bank of England announces 'gilt market operation'

BoE says purpose of these purchases will be to restore orderly market conditions

Jonathan Stapleton
clock • 4 min read
Updated: Bank of England announces 'gilt market operation'

The Bank of England (BoE)has announced it will carry out “temporary purchases” of long-dated UK government bonds from today.

In a statement issued this morning, the BoE said it had continued to monitor developments in financial markets "very closely" in light of the significant repricing of UK and global financial assets - but noted repricing had become more significant over the past day.

The statement said: "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."

The B0E said it that, in line with its financial stability objective, it stood ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.

To achieve this, it said it would carry out temporary purchases of long-dated UK government bonds from today (28 September).

It said: "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."

Since the announcement 25-year yields have fallen back from 5.023% at the end of yesterday to 4.068% at 3:30pm this afternoon. 30-year paper fell back from 4.991% to 3.975% over the same period.

FPC and MPC

The statement added that the bank's financial policy committee had noted the risks to UK financial stability from dysfunction in the gilt market and had recommended that action be taken - and had welcomed the bank's plans for "temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace".

The BoE added its purchases would be "time-limited". It said: "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 bank said its monetary policy committee had been informed of these temporary and targeted financial stability operations in line with the agreement governing the MPC's engagement with the bank's executive regarding balance sheet operations.

The B0E added: "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."

Operational details

In a separate note released this afternoon (28 September) the BoE said it stood 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 £5bn per auction - but said these parameters would be kept under review in light of prevailing market conditions. 

The first auction will be conducted today (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 and 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. 

The Bank said it would purchase conventional gilts of residual maturity greater than 20 years in the secondary market - but added that eligible instruments would be subject to exclusion criteria.

It noted that, in particular, it would not offer to purchase gilts newly issued by the UK Debt Management Office (DMO) within one week of their issue; and would 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 said it 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. 

The bank said it would offer to purchase gilts in a competitive reverse-auction. In each auction, the bank said it would offer to purchase up to a fixed total value of gilts, based on total proceeds, including any accrued interest.

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