Bank of England explains rejected offers at gilt buy-backs

THE Bank of England gave more details on Wednesday (Oct 5) about why it rejects offers at its new daily operations to buy up to £5 billion (S$8.04 billion) of long-dated gilts, after accepting almost none on Monday and Tuesday.

The BoE launched the temporary purchase programme for long-dated gilts on Sept 28 after 30-year gilts suffered their biggest daily price falls on record, pushing yields to a 20-year-high above 5 per cent and threatening the stability of some pension funds and the broader economy.

The announcement led to 30-year yields falling below 4 per cent, but at its first five auctions the BoE bought less than £4 billion of gilts out of a potential £25 billion, and 30-year yields have crept up to almost 4.2 per cent.

The BoE accepted none of the £2.23 billion of gilts it was offered on Tuesday, and just £22 million worth on Monday.

The BoE has said from the start that its purchases are subject to a reserve price, which is not public before the auction, and that it aims to be a backstop to ensure financial stability, rather than to cap yields at a particular level.

On Wednesday, the BoE spelled out the mechanism by which it decides which offers to accept.

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“The Bank’s allocation methodology is not based on absolute price or yield, or the identity of the seller,” it said.

“The Bank allocates or rejects each offer by comparing the spread between the yield it is offered and market mid-yields at the end of the auction, with the Bank’s reserve spread. Offers below the reserve spread are rejected,” it added.

In its market notice on Sep 28 when the programme began, the BoE said: “The Bank reserves the right to reject offers, in whole or in part, including in light of other offers received; and reserves the right to set a maximum offer price/minimum yield.” REUTERS