Carefully communicating this is not a Pivot to EQ but a temporary “safety net” to calm the panic. And that calmed the panic with minimal purchases.
By Wolf Richter for WOLF STREET.
It was the infamous Pivot back to QE: the Bank of England announced on September 28 that it would buy up to £5 billion a day of long-term British government bonds (gilts) “from temporary and targeted way”. He specifically stated: “The purpose of these purchases is to restore orderly market conditions.” He said the program would expire on October 14.
This came after long-term gilt yields soared last week, with the 10-year yield on September 28 approaching 5%. Panic had erupted after highly leveraged UK pension funds with £1.5 trillion in assets received margin calls on their gilt-based derivatives linked to their cash-driven investing strategy. passive (LDI) (explained here). Pension funds had begun to dump gilts along with other assets to meet these margin calls, creating a death spiral for gilts.
On September 28, the BOE stepped in and said it would buy up to £5 billion a day on the secondary market via auction until October 14. market that has become dysfunctional. It would also give pension funds time to sort out their problems.
The announcement calmed markets and 10-year gilt yields dipped below 4%, and yields plunged around the world as everyone breathed a sigh of relief that the panic was not spreading. And the meme was born that the BOE was the first central bank to “pivot” to QE.
But the BOE bought no bonds today, almost none yesterday and very few last week.
The BOE bought very little in the first three days of the program (September 28, 29 and 30), averaging just £1.21bn a day, down from £5bn a day, according to the BOE’s daily disclosures of gold purchases under this program. . He bought next to nothing on Monday (October 3), just £22m with an M; and he bought £0 – which means exactly “zero” – today (October 4):
It turns out that the program was very effective in calming the markets, calming the panic and mitigating the spike in long-term yields, without big purchases.
The BOE uses the reserve price during auctions. On Monday, he had received £1.91bn in offers to sell gilts and rejected them except for £22m.
Today he had received £2.23billion in offers and had rejected them all, along with his reserve price.
With these price limits, the BOE further communicates that this is a temporary “backstop,” as it calls it, to calm the gilt market, not the start of a new round of QE; and that he is serious about ending the program, as announced, on October 14.
On October 3, the BOE reiterated that “the purpose of these operations is to act as a safety net to restore orderly market conditions and reduce any risk of contagion to credit conditions for UK households and businesses”.
It said it is “studying demand patterns and will continue to use reserve pricing to ensure the tool’s support goal is met.”
And he said that “the Bank is prepared to adjust any of the other parameters of the auction in order to achieve this objective”.
In the same announcement, in a further sign that this is not a new round of QE, he said he had asked gilt traders to “identify” whether the offers are being made on their behalf or on behalf of them. name of their customers, from October 4th.
The BOE is caught between the unruly gilt market and 10% inflation wreaking havoc on the economy.
The 10-year guilt yield has fallen about 100 basis points since the panic peak at 3.87% now, roughly where it was on September 23:
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