Asset Purchase Facility Quarterly Report - 2022 Q4

Overview

This report contains information on the Bank of England’s Asset Purchase Facility (APF) for 2022 Q4, describing operations from 1 October 2022 to 31 December 2022. This report also contains information about how cash flows between the APF and HM Treasury (HMT) might evolve over time. More information on what the APF is and what it does is available in our Market Operations Guide. A short timeline describing the history of the APF is provided as background at the end of the report.

APF operations in the past quarter

This section contains details of UK government bond (gilt) and corporate bond operations conducted for monetary policy purposes during 2022 Q4. It also includes details of gilt operations run under the Bank’s financial stability mandate, and information on gilts lent to the Debt Management Office (DMO).

Operations conducted for monetary policy purposes

At its 21 September 2022 meeting, the Monetary Policy Committee (MPC) voted to begin sales of the APF’s stock of gilts held to support the MPC’s monetary policy remit.

On 28 September, as a result of a significant repricing of UK and global financial assets, particularly affecting long-dated UK government debt, the Bank announced that it would carry out temporary purchases of long-dated conventional gilts, in order to restore orderly market conditions in line with the Bank’s financial stability objective. Details of these purchases are set out later in this report. On 28 September the Bank’s Executive also postponed the beginning of gilt sale operations that had been due to commence from 3 October 2022.

On 20 October 2022, the Bank confirmed that gilt sales would begin on 1 November.

A total of eight gilt sales operations were run between 1 November and 8 December 2022. Gilts were sold across the short and medium maturity sectors, defined as gilts with a residual maturity of between 3–7 years (short) or 7–20 years (medium). This led to a reduction in the outstanding stock of £7.0 billion over the period.^{footnote [1]}

Over 2022 Q4, the Bank continued with its sale of sterling non-financial investment-grade corporate bonds, initially outlined in the 9 September 2022 Market Notice, and which commenced on the 27 September 2022. The stock of corporate bond holdings was reduced by a total of £6.0 billion during 2022 Q4.

Temporary holdings of gilts purchased on financial stability grounds

On 28 September 2022, the Bank announced that it would carry out temporary purchases of long-dated conventional gilts, in order to restore market functioning to meet its financial stability objective. These temporary operations were subsequently expanded to include index-linked gilts, and were concluded as planned on 14 October 2022.

In total, the Bank’s temporary holdings of gilts purchased in these operations peaked at £19.3 billion, made up of £12.1 billion of long-dated conventional gilts and £7.2 billion of index-linked gilts.

On 10 November 2022, the Bank announced that it intended to unwind this portfolio in a way that was timely but orderly, beginning from 29 November 2022. Consistent with this, sales were carried out not at a fixed pace, but instead in a demand-led way that was responsive to prevailing market conditions. This approach allowed the Bank to meet demand for gilts where it existed, while limiting the impact of such sales on wider market conditions.^{footnote [2]}

Between 29 November and 16 December 2022, a total of £13.9 billion of the £19.3 billion portfolio of purchased gilts were sold. On 12 January 2023, the Bank announced that it had completed the remaining sales. In total the Bank raised a total of £23.1 billion from the sale of the portfolio of temporary gilt purchases.

On 28 September 2022 the maximum authorised size of the APF was raised to accommodate the temporary gilt purchase operations. After completion of sales of the temporary gilt holdings, the maximum authorised size of the APF was reduced to £851 billion.

Summary of holdings

As of 28 December 2022 the total stock of assets held in the APF for monetary policy purposes was £843.7 billion, comprising £830.8 billion of gilt purchases and £12.9 billion of sterling non-financial investment-grade corporate bond purchases. At this point in time, £5.3 billion of gilts purchased in line with the Bank’s financial stability objective also sat in a segregated portfolio within the APF.

Table A summarises the stock of APF gilts and corporate bonds in 2022 Q4. Table A also includes a summary of the stock of temporary holdings of gilts purchases under the Bank’s financial stability mandate.

Chart 1 shows the cumulative net value of APF transactions between the establishment of the APF and 28 December 2022.

Chart 1 is separated into two panels with different scales. Gilt purchases and the Term Funding Scheme (TFS) – which from 2016 to 2019 was on the APF balance sheet before its transfer to the Bank’s balance sheet – are on the left panel.^{footnote [3]} The corporate bond schemes and legacy commercial paper schemes that have been operated via the APF balance sheet are on the right panel.

Chart 1: Cumulative APF purchases by type: amounts outstanding ^{(a) (b)}

Footnotes

• 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.

Chart 2 shows temporary holdings of long-dated gilts purchased during September–October 2022 under the Bank’s financial stability mandate, including both long-dated conventional and index-linked gilts. It shows both purchases and thereafter sales of these assets.

As at 28 December 2022, the Bank had reported cumulative asset purchases conducted for financial stability purposes, net of sales, totalling £5.3 billion.

Chart 2: Stock of temporary gilts purchased on financial stability grounds

Gilt lending arrangement with the DMO

Gilts purchased for monetary policy purposes via the APF continue to be made available for on-lending to the market through a gilt lending arrangement with the DMO. The average daily aggregate value of gilts lent by the APF to the DMO during the three months to 30 December 2022 was £12.0 billion.

Cash-flow arrangements between the APF and HM Treasury

In line with the indemnification of the APF by HMT, the assets held in the APF generate a range of cash flows which – alongside interest costs and the gains or losses made at maturity or sale – drive consequent cash transfers between HMT and the APF.

Since 2009, the APF’s activities have generated positive net cash flows from the APF to HMT, peaking at a cumulative £123.8 billion at end-September 2022.

When this arrangement was put in place it was recognised that reverse payments from HMT to the APF were likely to be needed in the future as Bank Rate increased and as the APF's gilt holdings were eventually unwound by the MPC.^{footnote [4]}

The first quarterly transfer from HMT to the APF occurred during 2022 Q4, involving the transfer of £828 million in October 2022. This was confirmed at the time in a Written Ministerial Statement made to the House of Commons on 19 October 2022.

A Quarterly Bulletin article in May 2022 explained the mechanics of cash flows and provided a projection into the future based on prevailing market conditions and the MPC’s policy at the time.

Changes in Bank Rate are particularly important for the path of APF cashflows. First, Bank Rate affects the interest payment the APF must make on its loan from the Bank – a rising Bank Rate means there is a smaller (or, indeed, negative) surplus of income once interest on the Bank of England loan is paid. Second, Bank Rate affects the level of the yield curve which will impact on the price received when gilts are sold from the APF to the private sector.^{footnote [5]}

Chart 3 below updates this summary of cash flows to date, and provides a refreshed projection into the future based on prevailing market conditions and the MPC’s current policy.^{footnote [6]} Annual net cash flows are projected using the market path for Bank Rate as of 30 December 2022. In order to illustrate how sharply the broad profile could change under different conditions, the cumulative position shows a range of outcomes based on paths for rates 100 basis points above and 100 basis points below the prevailing level on 30 December 2022.

Looking ahead, future cash flows are uncertain and highly sensitive to the assumptions used for market interest rates and how quickly the portfolio is unwound.

Chart 3: APF cash flows (actual and projected) ^(a)

Footnotes

• Sources: Bloomberg LLP for market rates as at 30 December 2022. Bank of England calculations for data in relation to APF cash flows.
• (a) The stock of assets used for the projection of cumulative cash flows is based on holdings as at 31 December 2022, consistent with the holdings reported in Table A.

APF history and background

Below is a summary of some of the key milestones in the history of the APF since its establishment in 2009. The APF sits in a wholly-owned Bank of England subsidiary company – The Bank of England Asset Purchase Facility Fund Limited (BEAPFF).

• 19 January 2009 Chancellor’s Statement announcing the intention to set up an asset purchase programme.
• 29 January 2009 Establishment of the APF Fund (see exchange of letters between the Bank and HMT).
• 9 November 2012 HMT announces the transfer of gilt coupon payments to the Exchequer (see exchange of letters between the Bank and HMT).
• 4 August 2016 MPC agrees to expand the APF by launching a Term Funding Scheme (TFS) and a Corporate Bond Purchase Scheme (CBPS) (see exchange of letters between the Bank and HMT).
• 21 June 2018 Bank and HMT agree new capital and income framework codified by a new Memorandum of Understanding.
• 21 January 2019 TFS drawings (and collateral) transferred from the APF to the Bank of England’s balance sheet.
• 19 March 2020 MPC agrees to expand the APF with a £200 billion increase to the stock of UK gilts and sterling non-financial investment-grade corporate bonds to reach £645 billion. This was followed by the MPC deciding to expand the APF with a £100 billion increase in June 2020, and then a further £150 billion in November 2020, bringing the total stock of asset purchases to £895 billion.
• 3 February 2022 MPC votes to begin to reduce the stock of UK gilt purchases by ceasing to reinvest maturing assets, and the stock of sterling non-financial investment-grade corporate bond purchases by ceasing to reinvest maturing assets and by a programme of corporate bond sales.
• 21 September 2022 MPC votes to begin sales of the stock of gilts held in the APF.

Links to additional information related to the APF

• Exchange of letters between the Bank and HMT , 17 February and 3 March 2009.
• Asset Purchase Facility Annual Report 2021/22.
• Asset Purchase Facility Quarterly Report – 2022 Q2.
• Asset Purchase Facility Quarterly Report – 2022 Q3.

ISSN 2041-1936