Carefully communicating this isn’t a Pivot to QE but a temporary “backstop” to calm a panic. And it calmed the panic with minimal purchases.
By Wolf Richter for WOLF STREET.
This was the infamous Pivot back to QE: The Bank of England announced on September 28 that it would buy up to £5 billion per day in long-dated UK government bonds (gilts) “in a temporary and targeted way.” It said specifically, “The purpose of these purchases is to restore orderly market conditions.” It said the program would expire on October 14.
This came after long-dated gilt yields blew out last week, with the 10-year yield on September 28 getting close to 5%. Panic had broken out after highly leveraged UK pension funds with £1.5 trillion in assets had received margin calls on their gilt-based derivatives linked to their liability-driven investment (LDI) strategy (explained here). The pension funds had started to dump gilts along with other assets to meet those margin calls, thereby creating a death spiral for gilts.
On September 28, the BOE stepped in and said it would buy up to £5 billion per day in the secondary market via auctions through October 14. It spelled out that this wasn’t a new round of QE, but a backstop for the gilt market that had become dysfunctional. It would also give pension funds time to sort out their issues.
The announcement settled down the markets, and 10-year gilt yields plunged back below 4%, and yields plunged around the world as everyone breathed a sigh of relieve that the panic wasn’t spreading. And the meme was born that the BOE was the first central bank to “pivot” back to QE.
But the BOE bought no bonds today, almost no bonds yesterday, and very little last week.
The BOE bought very little over the first three days of the program (Sep 28, 29, and 30), averaging only £1.21 billion per day, instead of £5 billion per day, according the BOE’s daily disclosures of gilt purchases under this program. It bought almost nothing on Monday (Oct 3), just £22 million with an M; and it bought £0 – meaning exactly “zero” – today (Oct 4):
Turns out, the program was highly effective in calming markets, settling down the panic, and unwinding the spike in long-term yields, without big purchases.
The BOE is using reserve pricing at the auctions. On Monday, it had received £1.91 billion in offers to sell gilts, and rejected all but £22 million of them.
Today it had received £2.23 billion in offers, and rejected all of them, with its reserve pricing.
With these pricing limits, the BOE is further communicating that this is a temporary “backstop,” as it calls it, to calm the gilt market, and not the beginning of a new round of QE; and that it 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 backstop to restore orderly market conditions and reduce any risks from contagion to credit conditions for UK households and businesses.”
It said that it is “studying patterns of demand and will continue to use reserve pricing in order to ensure the backstop objective of the tool is delivered.”
And it said that “the Bank stands ready to adjust any of the other parameters of the auction in order to secure that objective.”
In the same announcement, in a further sign that this is not a new round of QE, it said that it asked gilt dealers “to identify” whether offers are made on behalf of themselves or on behalf of their clients, starting on October 4.
The BOE is caught between the unruly gilt market and 10% inflation that is wreaking havoc on the economy.
The 10-year guilt yield has dropped about 100 basis point from the peak of the panic to 3.87% now, about where it had been on September 23:
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