Careful to communicate this is not 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 £5bn per day of long-dated British government bonds (gilt) “in a temporary and targeted manner”. It specifically said: “The purpose of these purchases is to restore orderly market conditions.” It said the program would expire on October 14.
This came after long-term gilt yields blew out last week, with the 10-year yield on September 28 nearing 5%. Panic had erupted after highly leveraged UK pension funds with £1[ads1].5 trillion in assets had received margin calls on their gilt derivatives linked to their liability-driven investment (LDI) strategy ( explained here ). The pension funds had started dumping gilts along with other assets to meet these margin requirements, thus creating a death spiral for gilts.
On 28 September, the BOE stepped in and said it would buy up to £5 billion per day in the secondary market via auctions until 14 October. It clarified that this was not another round of QE, but a backstop for the gold market that had become dysfunctional. It will also give the pension funds time to sort out their affairs.
The announcement sent markets reeling, with 10-year gilt yields plunging back below 4% and yields plunging around the world as everyone breathed a sigh of relief that panic had not spread. 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 during the first three days of the program (September 28, 29 and 30), averaging just 1.21 billion pounds per day, instead of 5 billion pounds per day, according to the BOE’s daily disclosures of gold purchases under this program. It bought almost nothing on Monday (October 3), just £22m with an M; and it bought £0 – which means exactly “zero” – today (October 4):
The program proved to be very effective in calming markets, calming panic and winding down the rise in long-term yields, without large purchases.
BOE uses reserve pricing in the auctions. By Monday it had received £1.91bn of offers to sell gilts, rejecting all but £22m of them.
Today it had received £2.23 billion in offers, rejecting all of them, with reserve prices.
With these price limits, the BOE further communicates 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 programme, as announced, on 14 October.
On 3 October, the BOE reiterated that “the purpose of these operations is to act as a backstop to restore orderly market conditions and reduce any risk from 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 backstop target of the utility is delivered.”
And it said that “The Bank is ready to adjust some of the other parameters of the auction to ensure this objective.”
In the same announcement, in a further sign that this is not another round of QE, it said it asked gold 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 gold market and 10% inflation wreaking havoc on the economy.
The 10-year bond yield has fallen about 100 basis points from the peak of the panic to 3.87% now, about where it had been on September 23:
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