Kwarteng Greenlighted BOE £100 Billion Of Bond-Buying To Quell Market Mayhem

Last week, the Bank of England intervened to prevent a gilt market crash by pledging to purchase long-dated bonds after the fallout from Prime Minister Liz Truss’s proposed tax cuts. As collateral calls mounted, forcing pension funds to scramble for cash from investment managers to meet margin calls, Bloomberg revealed that the central bank’s bond-buying program is much larger than previously announced. 

Bloomberg reported Finance Minister Kwasi Kwarteng signed off on a £100 billion ($113 billion) bond-buying program for the BoE to soothe strains in the gilt market which has so far halted a sell-off that threatened to spiral out of control, sparking a liquidity crisis among pensions funds. Initially, the BoE pledged £65 billion ($69 billion) to buy long-dated gilts. 

Kwarteng approved the purchase of long-dated gilts up to £100 billion, according to a letter from Kwarteng to Mel Stride, a member of Parliament who leads the Treasury Committee. 

“The Bank has requested an extension to the maximum size of the APF by £100 billion to £966 billion,” the Chancellor wrote in a letter dated published on Friday. “There was a special urgency to incur this liability.”

The higher amount wasn’t mentioned last week when the BoE restarted QE in a “temporary and targeted” bond buying operation – which will be as “temporary” as “temporary” inflation was – warning of a “material risk to UK financial stability” if the turmoil in the UK government bond market were to continue. It also raised the prospect of a “tightening of financing conditions and a reduction of the flow of credit to the real economy,” but it really meant that QT was over before it even started, and QE is back.

Bloomberg pointed out: “The usual exchange of letters between Kwarteng and BOE Governor Andrew Bailey to approve the increase has not yet been published. The BOE declined to comment on the reason for the size of the request.” 

So far, since the bond-buying operation began last Wednesday, the BOE offered to purchase £5 billion per market day through Oct. 14, suggesting a total of £65 billion. The letter to Stride indicates central bankers can increase buying if warranted. However, buying has been on the low side, with only £3.7 billion out of a potential £20 billion across bond-buying operations. 

After the UK 10Y gilt yields skyrocketed to 4% last week in an exponential move that can only be described as the bond market breaking, yields have faded Tuesday to around 3.83%. 

The pound appears to have stabilized after last week’s historic drop. 

And UK equity markets attempt to rebound and regain lost support. 

Question remains is £65 billion to £100 billion in BoE bond-buying enough to restore confidence?