The Bank of England didn’t buy bonds today after buying just £22m a day instead of £5bn a day on Monday

The Bank of England didn't buy bonds today after buying just £22m a day instead of £5bn a day on Monday
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Communicating this carefully is not a pivot to QE, but a temporary backstop to calm a panic. And it calmed the panic with minimal purchases.

Through Wolf Richter to the WOLF ROAD.

This was the infamous pivot back to QE: the Bank of England announced on September 28 that it would buy up to £5bn a day in long-dated UK government bonds (gilts) “in a temporary and targeted manner”. Specifically, it says: “The purpose of these purchases is to restore orderly market conditions.” It said the program would end on October 14.

This comes after long-dated gilt yields blew up last week, with the 10-year yield hitting nearly 5% on September 28th. Panic erupted after heavily leveraged UK pension funds with £1.5 trillion in assets received margin calls for their gilt-based derivatives linked to their liability-based investment (LDI) strategy (explained here). Pension funds had begun dumping gilts along with other assets to meet these margin calls, setting off a death spiral for gilts.

On September 28, the BOE stepped in, announcing it would buy up to £5 billion a day on the secondary market through auctions until October 14. She explained that this is not 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 problems.

The announcement calmed markets and 10-year gilt yields slipped back below 4% and yields fell globally as everyone breathed a sigh of relief that panic was not spreading. And the meme was born that the BOE was the first central bank to go 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 (28, 29 and 30 September), averaging just £1.21 billion a day instead of £5 billion a day, according to the BOE’s daily disclosures Regarding Gilt Purchases Under This Program Program . It bought almost nothing on Monday (October 3), just £22million with an M; and it bought £0 today (October 4th) – which means exactly “zero”:

The program turned out to be very effective in calming the markets, calming the panic and unwinding the surge in long-term yields without large buying.

The BOE uses reserve prices at the auctions. On Monday she had received offers to sell Gilts worth £1.91bn and rejected all but £22m.

Today it had received £2.23billion in offers and rejected all of them with its reserve prices.

With these price limits, the BOE further communicates that this is what it calls a temporary “backstop” to calm the Gilt market and not the start of a new round of QE; and that it is serious about ending the program on October 14 as announced.

On October 3rd, the BOE repeated that “the purpose of these operations is to act as a backbone for the restoration of orderly market conditions and to reduce any risks of credit contagion to UK households and businesses”.

It said it is “studying demand patterns and will continue to use reserve prices to ensure the tool’s backstop objective is met.”

And it said that “the bank is willing to adjust all other parameters of the auction to achieve this goal.”

In the same announcement, in another sign that this isn’t a new round of QE, it said it asked Gilt traders to “identify” whether offers are being made on their own behalf or on behalf of their customers, beginning on April 4 October.

The BOE is caught between the unruly gilt market and 10% inflation, which is wreaking havoc on the economy.

The 10-year bond yield has fallen about 100 basis points since the peak of the panic to now 3.87%, roughly where it was on September 23:

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