Bank Of England Forced To Step In Again - Temporary Purchases Of Index-linked Gilts

11th October 2022

Market Notice 11 October 2022.

The Bank of England (Bank) has announced that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022 alongside the Bank's existing daily conventional gilt purchase auctions. This Market Notice sets out the arrangements that will apply to these purchases.

The Bank has announced that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022. Index-linked gilts will be purchased via a separate auction each day, in addition to the Bank's existing daily conventional gilt purchase auctions.

These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity. As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury. The Bank has also consulted with the Debt Management Office.

As announced on 10 October, the Bank stands ready to purchase up to £10bn of gilts each day, of which up to £5bn will be allocated to long-dated conventional gilts and up to £5bn to index-linked gilts. The pricing of this additional operation will reflect its nature as a backstop and that this is not a monetary policy instrument. The total size of these auctions will be kept under review. All purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.

The Bank may adjust any of the parameters of its auction in order to achieve its financial stability objective.

The remainder of this Market Notice sets out the arrangements that apply to these index-linked gilts purchases, as well as amendments to the operations to purchase long dated conventional gilts announced on 28 September 2022. The Market Notice may be supplemented, amended and refined further over time.

The operations to purchase long dated conventional gilts announced on 28 September 2022 are unaffected by this Market Notice, except that the auctions will now take place daily between 3.15pm and 3.45pm as set out below.

Form of operation
The Bank is inviting market participants to offer to sell index-linked gilts in competitive reverse-auctions. Initially the size of each auction will be up to £5 billion. This will be kept under review each day in light of prevailing market conditions.

Reflecting the specific dynamics in the market for index-linked gilts, the Bank will set a minimum yield that will be applied to its temporary purchase operations for these index-linked gilts.

Initially, the Bank will not allocate any offers for index-linked gilts at real yields below the levels observed, as quoted by Tradeweb, at close of business on 10 October 2022.footnote[1]

In addition, the Bank is studying patterns of demand and intends to use reserve pricing in order to ensure the backstop nature of the scheme is delivered. In its auctions for index-linked gilts, the Bank would be likely to accept most offers above market mid-yields at the close of the auction, subject to competition within the auction and to the minimum yields described above. As confirmed in the 3 October 2022 Market Notice, the 'reserve spread' will be reviewed ahead of each auction to ensure consistency with the backstop nature of the scheme. In doing so, the Bank takes into account a wide range of information on prevailing market conditions and the pattern of demand in its auctions. More information on the Bank's reserve pricing approach is available on the Bank's website.

Timing and frequency of operations
Auctions to purchase index-linked gilts will be conducted daily from 11 October 2022 to 14 October 2022, between 2.15pm and 2.45pm.

Auctions to purchase long dated conventional gilts will be conducted daily from 11 October 2022 to 14 October 2022, between 3.15pm and 3.45pm.

The auction schedule will be kept under review, and details of each auction will be confirmed by the Bank on its wire services pages at 9am.

Eligible instruments in index-linked gilt purchases
The Bank will purchase index-linked gilts with a residual maturity of three years and above in the secondary market. Index-linked gilts with an 8-month indexation lag will be excluded.

Eligible instruments will be subject to further exclusion criteria. In particular, the Bank will not offer to purchase index-linked gilts newly issued by the UK Debt Management Office (DMO) within one week of their issue; and will not offer to purchase index-linked gilts which the DMO has announced it will re-open, including via a mini-tender, during the one week before and after re-opening.

In addition, the Bank does not intend to purchase index-linked gilts where it holds more than 70% of the free-float, i.e. the total amount in issue minus government holdings.

Instrument eligibility will be kept under review.

Auction parameters for index-linked gilt purchases
Auctions will be held using the Bank's electronic tendering system, Btender. The Bank reserves the right, at its sole discretion, to restrict the number and/or the timing of offers submitted by counterparties who do not have access to Btender.

Counterparties must input the nominal sterling amount in millions for each specific index-linked gilt they wish to sell and the clean price they wish to offer.

The number of decimal places allowed for the price is currently 3.

Offers are submitted by counterparties using a clean price.

The minimum offer amount and increment are currently set at £5 million and £1 million respectively.

The Bank will not restrict the maximum total value of index-linked gilts for purchase from a single counterparty in each auction.

The Bank reserves the right, at its sole discretion, to reject offers, in whole or in part, including in light of other offers received; and reserves the right, at its sole discretion, to set a minimum offer yield.

Offers will be allocated in descending yield order, based on the attractiveness of offers for different stocks relative to market yields, subject to the conditions mentioned above. Offers that are accepted at the lowest yield may be scaled down on a pro rata basis and will be rounded down to the nearest allocation increment, currently set at £0.1 million.

Offers are accepted in full or in part at the counterparty's offer price. The amount of each accepted offer in total proceeds will be paid to the counterparty.

The Bank reserves the right, at its sole discretion, to cancel an auction at any time before the results are published. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a subsequent day.

Settlement of index-linked gilt purchases
Confirmation of the nominal amount allocated in the auction and the accepted clean price will be available in Btender. Confirmation of all other trade details, including settlement proceeds, will be confirmed via a trade ticket sent by the Bank by email or Bloomberg communication as soon as possible after the close of the auction on the operation day. This will form the agreed transaction record. Index-linked gilt purchases will normally settle on a T+1 basis. All counterparties must comply with the Settlement procedures outlined in the Asset Purchase Facility (APF) Purchase Operating Procedures.

Fire-fighting Bank of England forced to buy inflation linked bonds

UK bond market moves are dramatic and confusing And analysts think it could get worse

Pension funds urge Bank of England to extend bond-buying IMF cuts growth forecasts