Bank of England steps once more unto the breach

The Bank of England has just announced a new raft of measures to support the gilt market, with the headline points that it is going to double the cap of its daily auctions this week to £10bn, but still halt all gilt purchases on Oct 14.

To some this might seem a bit like rolling out an extra bottle of booze just before forcing everyone to go cold turkey. Anyway, the bank’s actual purchases have only come to about £5bn, compared to the £40bn on offer from the so-far eight daily auctions.

But we think the crucial bit is actually the new “temporary expanded collateral repo facility” that the Bank also unveiled today (find someone who loves you as much as central banks love awkward acronyms).

Second, the Bank will launch a Temporary Expanded Collateral Repo Facility (TECRF). This facility will enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations, which will run beyond the end of this week. Under these operations, the Bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index linked gilts, and also a wider range of collateral than normally eligible under the SMF, such as corporate bond collateral.

Third, the Bank will also stand ready through its regular Indexed Long Term Repo operations each Tuesday to support further easing of liquidity pressures facing LDI funds. This permanent facility will provide additional liquidity to banks against SMF eligible collateral, including index linked gilts, and so support their lending to LDI counterparties. Liquidity is also available through the Bank’s new permanent Short Term Repo facility, launched last week, which offers an unlimited quantity of reserves at Bank Rate each Thursday.

Beyond the end of this week’s operations, the Bank will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future.

You can find the full T&C’s for the TECRF here, such as the fee level of 15 basis points above the Bank’s interest rate. The notice says that the temporary facility will remain open on a daily basis until November 10, but we remember Milton Friedman’s adage about temporary government programmes.

The TECRF will accept a broader array of collateral than just gilts, such as investment grade corporate debt (subject to the varying haircuts, natch). The Bank clearly hopes this will ensure that people have enough collateral for liquidity to prevent any forced firesales and renewed LDI doom-loop if gilts start puking again.

RBC Capital Markets is sceptical that the announcement will meaningfully change the market dynamics.

The question is whether these new measures will really change the market function substantially. First, the BoE did not get anywhere close to buying the maximum amounts in the previous operations anyway and thus increasing the maximum potential purchases would not necessarily change the fate of the market if actual purchases remain low. Secondly, as regards the repo operations, the question is whether there has been a significant liquidity demand from banks in the first place and furthermore, it appears that the repos collateralized with corporate bonds appear quite expensive with rather large hair-cuts applied and thus it remains debatable whether they will be used much in the first place

We’re a bit more positive, mostly because the value of today’s statement is less the actual details and more the signal that the Bank of England is not taking its eye off the gilt ball, and will intervene if anything like the events of late September happen again.