Asset Purchase Facility Quarterly Report - 2019 Q3

Asset Purchase Facility

The Bank of England Asset Purchase Facility Fund was established as a subsidiary of the Bank of England on 30 January 2009, in order to fulfil the remit of the Chancellor of the Exchequer given to the Bank on 19 January 2009^[1] and detailed in an exchange of letters with the then Governor on 29 January 2009.^[2] This remit was subsequently expanded to enable the Fund to be used as a monetary policy tool, at the request of the Monetary Policy Committee (MPC), as detailed in the exchange of letters on 17 February and 3 March 2009.^[3]

As the then Governor noted in his letter of 29 January 2009, ‘it is important that the Asset Purchase Facility (APF) is operated in an open and transparent manner. The Bank will publish a quarterly report on the transactions undertaken as part of the facility, shortly after the end of each quarter’. This report covers the three months to 30 September 2019. More information on the Committee’s monetary policy decisions can be found in the Inflation Report.^[4]

The Fund is governed by a Board of Directors, and publishes an Annual Report and Accounts. The Fund and the Bank are indemnified by the Treasury from any losses arising out of or in connection with the Facility.^[5]

HM Treasury announced arrangements to transfer gilt coupon payments received by the APF, net of interest costs and other expenses, to the Exchequer on 9 November 2012. These arrangements are detailed in an exchange of letters between the then Chancellor of the Exchequer and the then Governor.^[6]

The APF’s size and activity has evolved over time as the MPC has voted to undertake additional asset purchases, or to launch new schemes, in order to meet the 2% inflation target. Most recently, the MPC voted in August 2016 to introduce a package of measures to support the UK economy: a Term Funding Scheme (TFS); a £10 billion Corporate Bond Purchase Scheme (CBPS); and a £60 billion increase to the target for the stock of purchases of UK government bonds, financed by the creation of central bank reserves, to £435 billion.^[7] The agreement to increase the size and broaden the composition of the APF to cover these new measures was set out in an exchange of letters between the Governor and the then Chancellor on 4 August 2016.^[8] In August 2017 the MPC voted unanimously to close the drawdown period for the Term Funding Scheme (TFS) on 28 February 2018, as envisaged when the scheme was introduced.

On 21 June 2018, the Bank and HM Treasury agreed a new capital and income framework for the Bank, codified by a new Memorandum of Understanding.^[9] Its objectives are to ensure that the Bank's policy work is fully funded, and that the Bank is equipped with capital resources consistent with the monetary and financial stability remits it has been given by Parliament, while maintaining responsible stewardship of public funds. The framework captures a set of principles for determining which monetary policy or financial stability operations should be undertaken on the Bank’s balance sheet and which should be indemnified by the Treasury.

In keeping with these principles, on 21 January 2019 all TFS drawings, and the collateral backing them, were transferred from the APF to the Bank of England’s balance sheet. Under the same framework, the Treasury also committed to a capital injection of £1.2 billion, subsequently completed. Figures for the TFS are therefore no longer included in this Report. Details of usage and outstanding balances continue to be available via the Bank of England’s website.^[10]

Operations

Table A summarises the stock of APF gilt and corporate bond purchases in 2019 Q3, reported on a settlement date basis.

Table A Summary of stocks in Asset Purchase Facility Schemes^(a) (£ millions)

Source: Bank of England.

(a) The outstanding amount in each facility is reported on a settlement date basis.
(b) The overall stock of APF gilt purchases, less redemptions, valued at initial purchase price.
(c) The overall stock of APF Corporate Bond Purchase Scheme purchases, less redemptions, valued at initial purchase price.
(d) 2019 Q2 measured as the amount outstanding as at 26 June 2019.

Corporate bond transactions to the value of £412 million took place during the quarter as part of a programme to reinvest the cash flows associated with reductions in the stock of corporate bonds held by the APF.^[11] It is the first time that such reinvestments have taken place, as agreed by the MPC at its meeting in June 2019. As a result, the stock of corporate bonds held by the APF at the end of 2019 Q3, valued at initial purchase price and net of sales and redemptions, was £9.745 billion.

During Q3 the APF made £13.984 billion of gilt purchases, to reinvest the cash flows associated with the maturities on 22 July of the 1.75% 2019 gilt and on 7 September of the 3.75% 2019 gilt owned by the APF. Reinvestment auctions were completed on 4 October 2019.

Chart 1 shows the cumulative net value of APF transactions between the establishment of the Fund and 30 September 2019. As at 30 September 2019, cumulative assets purchased net of sales, redemptions and repayments totalled £439.663 billion.

Chart 1 Cumulative net value of APF transactions by type^(a)

Source: Bank of England.

(a) Data based on settled transactions.
(b) On 21 January 2019 the TFS drawings were moved to the Bank’s balance sheet and therefore are not reported after this date.

Conditions in UK government and corporate bond markets

UK government bond market

During 2019 Q3, nominal gilt yields fell on average, by around 45 basis points (Chart 2).

Chart 2 UK nominal spot rates^(a)

Sources: Bloomberg Finance L.P., Tradeweb and Bank calculations.

(a) 28 June 2019 and 30 September 2019 were the last working days of their respective quarters.

Gilts purchased via the Facility continue to be made available for on-lending to the market through the gilt lending arrangement with the DMO.^[12] The average daily aggregate value of gilts lent by the APF to the DMO during the three months to 30 September 2019 was £3.809 billion.

UK corporate bond market

Sterling investment-grade non-financial corporate bond spreads widened by three basis points over 2019 Q3 (Chart 3).

Chart 3 Sterling investment-grade non-financial corporate bond spreads^(a)

Sources: ICE BofAML and Bank calculations.

(a) Spread over government rates, adjusted for the embedded option values of certain bonds (option-adjusted spread).

Gross issuance of corporate bonds by UK private non-financial corporations (PNFCs) was higher than in 2018 Q3, although cumulative gross issuance year-to-date to 2019 Q3 was lower than in 2018 (Chart 4).

Chart 4 Cumulative gross issuance of bonds by UK PNFCs^(a)

Source: Deals Business Intelligence from Refinitiv.

(a) Issuance by UK private non-financial corporations (PNFCs) or their financing vehicles. Includes investment-grade and non-investment grade bonds and medium term notes. Data are subject to periodic revisions.

More information on recent market conditions can be found in Inflation Reports^[13] and minutes of the MPC meetings.^[14]