Communicating this carefully is not a Pivot to QE but a temporary “backstop” to quell panic. And calmed the panic with minimal purchases.
By Wolf Richter by 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 a day in long-term UK government bonds (gilts) “on a temporary and targeted basis”. He specifically said: “The purpose of these purchases is to restore orderly market conditions.” She said the program would expire on October 14.
This came after long-term gilt yields exploded last week, with the 10-year yield on September 28 approaching 5%. Panic had broken out after highly leveraged UK pension funds with £1.5tn in assets received margin calls on their gilt-based derivatives linked to their liability-driven investment (LDI) strategy. (explained here). Pension funds had begun dumping gilts along with other assets to meet those margin calls, thus creating a death spiral for gilts.
On September 28, the BOE stepped in and said it would buy up to £5bn a day on the secondary market through auctions until October 14. He clarified that this was not a new round of QE, but a support for gilts. market that had become dysfunctional. It would also give pension funds time to work out their problems.
The announcement reassured markets, and 10-year gilt yields fell below 4% again, with yields plummeting 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” back to QE.
But the BOE bought no bonds today, hardly any bonds yesterday and very little last week.
The BOE bought very little during the first three days of the show (September 28, 29 and 30), averaging just £1.21bn per day, rather than £5bn per day, according to daily BOE disclosures on gilt purchases under this program Purchased almost nothing on Monday (3 Oct), just £22m with an M; and bought £0, which means exactly “zero”, today (October 4):
It turns out that the program was very effective in calming markets, quelling panic and undoing the rise in long-term yields, without big buying.
The BOE is using reserve prices in the auctions. By Monday, it had received £1.91bn in offers to sell gilts and turned down all but £22m.
He had received £2.23bn in offers today and turned them all down, at his reserve price.
With these price caps, the BOE is also communicating that this is a temporary “backstop,” as it calls it, to calm the gilt market, and not the start of a new round of QE; and that the end of the program is taken seriously, as announced, on October 14.
On October 3, the BOE reiterated “The purpose of these transactions is to act as a backstop 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 objective is met.”
And he said that “the Bank is willing to adjust any of the other parameters of the auction to ensure that objective.”
In the same announcement, in a further sign that this is not a new round of QE, he said he asked gold dealers to “identify” whether bidding is being done on behalf of themselves or their clients, starting of October 4.
The BOE is caught between the unruly gold market and the 10% inflation that is wreaking havoc on the economy.
The 10-year guilt yield has fallen about 100 basis points from the peak of the panic to 3.87% now, roughly where it was on September 23:
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