Bank of England spends fraction of £65bn emergency gilt-buying programme

The Bank of England said it has spent just a fraction of the emergency £65 billion gilt-buying programme launched last week to prevent a “self-reinforcing spiral” in the wake of the mini-budget.

In a letter to Treasury Select Committee chairman Mel Stride, the Bank said it had stayed well within its daily limit of £5 billion in gilt purchases, which it was forced to begin after fears that some UK pension schemes were at risk of collapse.

It said it has spent £3.7 billion across six operations conducted so far, having reportedly bought no bonds on Tuesday and £22 million worth on Monday, and said it would be unwound in a “smooth and orderly fashion” once it comes to its scheduled end on October 14.

Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, said: “Once the purchase programme is complete, the operation will be unwound in a smooth and orderly fashion once risks to market functioning are judged by the Bank to have subsided.

“The approach to unwind will depend, among other things, on the scale of actual purchases, the market conditions during those purchases and the market conditions when the purchases end.”

Responding to a letter from Mr Stride asking for greater clarity on why the Bank intervened and when it will come to an end, Sir Jon reiterated that there had been a risk of severe disruption of core markets and “widespread financial instability”.

But the Bank has not needed to spend anywhere near as much as it initially set aside for the programme, since it was announced on September 28.

It said it is working with the UK’s pensions and financial regulators to ensure that liability-driven investment (LDI) funds – an investment strategy used by final-salary pension schemes – are more resilient in light of current volatility in the financial markets.

In the letter, Sir Jon also shed light on the turmoil in gilt markets that preceded the unusual intervention.

He said that the speed and scale of the rise in gilt yields, which refers to the cost of government borrowing, was unprecedented and put pressure on funds.

He said: “The Bank was informed by a number of LDI fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value

“As a result, it was likely that these funds would have to begin the process of winding up the following morning.

“In that eventuality, a large quantity of gilts, held as collateral by banks that had lent to these LDI funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability.”

He added that staff at the Bank of England worked “overnight” to design an intervention strategy.

As a result of its intervention, 30-year gilt yields fell back down by more than 100 basis points.

However, in recent days, there has been a slight uptick in gilt yields again, with ten-year yields reaching just shy of 4% on Wednesday.

It came after the Prime Minister Liz Truss told the Conservative Party that the Government was laser focused on economic growth and has been forced to make “difficult but necessary” decisions to achieve it.

The Bank’s Financial Policy Committee (FPC) is to publish its next financial policy and record on October 12.