BoE Decision to buy Government Bonds

RG2015

The Bank of England is buying up Government Bonds in an attempt to calm markets. However in trying to make some sense of it I came across the following on the BBC website.

But it was not a decision made by the Bank's Monetary Policy Committee, who were informed of the decision after it was made by the Bank's financial experts.

It comes at exactly the same time as that committee had been committed to do the exact reverse policy - selling government debt. That process was due to start next week and has now been delayed.

I am now struggling even more to understand who is doing what.

Without making it political, can anyone provide a simple explanation of who is responsible for what between the Treasury, the BoE Monetary Committee and the BoE Financial Experts?

masonic

This was emergency action by the BoE to stop long-dated bond yields rising to the point pension funds (which often hedge their liabilities using derivatives) from facing margin calls they couldn't satisfy. A number of pension funds would have become insolvent today if this emergency action wasn't taken.

If you remember back to the global financial crisis, similar swift and decisive action was taken to protect our financial system. Parallels can be drawn from that, although the cause this time is very different.

[Deleted User]

My understanding is the BOE is essentially forcing down gilt yields by buying gilts, allowing final salary pension funds that rely on these gilts to make enough money selling them to carry on paying their pensioners. Once this process is complete, the BOE then plans to allow yields to rise again before eventually disposing of the gilts into the market (thereby taking a big loss onto the taxpayer).

What I'm not clear about is this: if the pension funds do sell all their gilts to the BOE, how will they pay their pensioners in future? Or will the pension funds continue to rely on gilts, meaning that if yields do eventually come back up again, the BOE will just have to repeat this trick again and again? And if they do, isn't this essentially just more QE?

EthicsGradient

I would think that, yes, this is effectively more QE. The loss isn't then "onto the taxpayer", but onto the holders of sterling in general - this is the modern-day equivalent of "printing money"; the BoE pays for the net loss by, in the end, creating more money than destroying; this devalues the sterling in circulation a little. How much that will be after all the buying and selling is done, it's hard to foresee (for me, anyway). But it's not what you want to see when inflation is already high.

MarkCarnage

The BoE is seeking to provide temporary stability and order in the gilts market. They were lobbied urgently yesterday by institutional investment managers who told them that there were serious systemic threats to large pension funds if action wasn't taken immediately. The main issue was the speed of the rise in gilt yields (fall in prices) in what had become a disorderly market with various negative feedback loops. 
It is to try to ensure that pension funds retain enough liquidity/solvency to keep paying benefits to their members. Pension funds are unlikely to be selling gilts to the BoE, it will be tapping into new issuance. It's a fair point that it looks like more QE, and in a way it is, but it was made clear that this is only temporary to allow pension funds breathing space. Some schemes were getting collateral cash calls of hundreds of millions literally overnight. 
As noted above, there are similarities with 2008, though then it was the banks with liquidity and solvency problems. Leverage in stressed markets is a common theme though. The gilt market was already under pressure as inflation had risen, the UK fiscal and trade deficits were rising again, and then Kamikwaze chose to pour petrol on the flames last week......it's quite breathtaking how some Tories are trying to deflect away from this as the cause. Liars to the end. 

Gary1984

From what I can tell it was more a liquidity issue for the pension funds. They needed to pay cash to cover their positions on the derivatives they held that had moved sharply against their favour with the current turmoil in the markets. Because interest rates have moved so quickly the immediate need for cash was large.

As such they needed to sell their gilts quickly to get the cash.  Problem was everyone was selling at the same time and buyers dried up. With nobody to sell gilts to they would have failed to meet their obligations had the BoE not stepped in to provide some liquidity.

MarkCarnage

As such they needed to sell their gilts quickly to get the cash.  Problem was everyone was selling at the same time and buyers dried up. 

True to some extent. Schemes have been selling all liquid assets (gilts, credit, equities) in recent days and weeks to cover these collateral calls. The problem has been there for some weeks, but it blew up with the gilt market after the disastrous mini budget last week. I suspect that this Government have blown any credibility they had already, though they are so self absorbed they probably still don't get it. May need another serious kicking from the bond and currency markets for it to sink in......we are in emerging market/IMF bailout territory if this continues. 

EthicsGradient

Here's another question: if this reverses an action the MPC was planning on, does that make a higher, or an earlier, base rate increase more likely?

Millyonare

* 2008 = junk mortgages
* 2022 = junk gilts

In 2008, the BoE (and others) allowed your banks to gamble recklessly on highly leveraged mortgages.

in 2022, the BoE (and others) allow your pension funds to gamble recklessly on highly leveraged gilts.

The UK this week has come within a whisker of a £1.5 trillion pension catastrophe.

Dyor, etc.

Descrabled

I remember that in the 70s most pension funds placed their capital in the stockmarket and most company pension funds made good returns and provided defined benefits based on final salary and years service.

Along came Blair and Brown and raided the returns of pension funds. Along came Maxwell and raided the Mirror pension fund. Along came the pension regulator and insisted that these funds reduced their risky stockmarket investments and put their money in stable, less risky gilts.

Result is that most private pensions are now defined contribution and these stable bonds are now manipulated by the central banks. Progress?

The BoE has been buying gilts through QE and printing money. This kept interest rates artificially low. Buying these gilts pushed their prices up and with fixed coupons the interest was low.

Now the BoE wants to reduce inflation so ends QE and in effect remove money in circulation by selling off gilts and cancel the cash to push up interest rates. Lower cost of gilts with a fixed coupon means higher interest.

The gilts the pension funds are forced to own are now worth less because of the actions now and previously by the BoE using QE has helped us get in this mess.

The new PM and CofE just managed to cap it all with the mini-budget.

masonic

The problem was that the pension funds weren't holding enough gilts to cover their liabilities. They were investing in riskier assets and using derivatives to hedge their risk exposure. Derivatives break down in extreme market conditions. Pension funds required extra collateral to maintain their hedging. This required a mass sell-off of other assets including gilts, corporate bonds and equities, leading to a downward spiral of asset prices.

Had the pension funds covered their liabilities with gilts this wouldn't have been a problem. That income stream was not under threat. Had they been able to invest in risk assets without hedging, this would have been a less of a problem. Most importantly, if there hadn't been a budget unveiling a programme of unfunded tax cuts widely understood* to trash currency and government debt markets, this wouldn't have been a problem.

* chief among those warning of this outcome being some guy called Rishi Sunak who stood up night after night in leadership hustings to warn of what was going to happen