Asset Purchase Facility Quarterly Report - 2023 Q2

Overview

This report contains information on the Bank of England’s Asset Purchase Facility (APF) for 2023 Q2, describing operations from 1 April 2023 to 30 June 2023. It 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 2023 Q2. It also includes information on gilts lent to the Debt Management Office (DMO).

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. Sales auctions began on 1 November 2022.

Over 2023 Q2, the Bank continued with the sale of the APF’s stock of gilts held for monetary policy purposes. A total of 12 gilt sales operations were run between 1 April and 30 June. Gilts were sold equally across the short, medium and long-dated maturity sectors, defined as gilts with a residual maturity of between 3–7 years (short), 7–20 years (medium) or over 20 years (long). This led to a reduction in the stock of gilts held for monetary policy purposes of £13.9 billion.

On 6 June 2023, the Bank announced that it had completed its sales of sterling non-financial investment-grade corporate bonds, which began on 27 September 2022. Sixteen auctions were held over 2023 Q2, and the stock of corporate bond holdings was reduced from £7.1 billion to £833 million. The remaining very short maturity bonds will continue to be held in the portfolio and will mature fully by 5 April 2024. The Bank intends to hold these bonds to maturity, though it will continue to consider participation in any open market tender offers on a case-by-case basis.

Summary of holdings

As of 28 June 2023, the total stock of assets held in the APF for monetary policy purposes was £804.1 billion, comprising £803.3 billion of gilt purchases and £833 million of sterling non-financial investment-grade corporate bond purchases.

Table A summarises the stock of APF gilts and corporate bonds in 2023 Q2.

Chart 1 shows the cumulative net value of APF transactions between the establishment of the APF and 30 June 2023.

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 [1]} The corporate bond schemes and legacy commercial paper schemes that have been operated via the APF balance sheet are shown 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.

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 June 2023 was £1.65 billion. Chart 2 sets out the average daily value of APF gilts lent to the DMO via the gilt lending agreement over the past eight quarters.

Chart 2: Average daily aggregate value of lending of APF gilts to the DMO

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.

Between 2009 and 2022, the APF’s activities 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 [2]}

The first such quarterly transfer from HMT to the APF occurred in October 2022 and subsequent payments have been made on a quarterly basis thereafter.

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 cash flows. 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 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 have an impact on the price received when gilts are sold from the APF to the private sector.^{footnote [3]}

Chart 3 below updates the previously published summary of actual cash flows to date and provides a refreshed estimate into the future. The projection remains based on prevailing market conditions and the MPC’s current policy stance in relation to APF unwind.^{footnote [4]}

Future annual net cash flows – shown by the bars – are projected using the market path for Bank Rate as of 30 June 2023.

In order to show how sharply the cumulative profile for cash flows could differ under a range of conditions, the cumulative projections show outcomes based on various assumptions for the path of Bank Rate. These include the market path for Bank Rate as of 30 June 2023, and – in line with the approach used in previous APF Quarterly Reports – estimated paths for rates 100 basis points above and 100 basis points below that.

Given the context of recent rises in Bank Rate, and in line with the approach of the 2023 Q1 APF Quarterly Report, this projection includes a further scenario. This is an illustrative scenario in which Bank Rate falls gradually over the coming three years back to a level equal to an estimate of the equilibrium interest rate, as described in Box 6 of the August 2018 Inflation Report, and then remains at that level for the remaining life of the APF.

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) (b)}

Footnotes

• Sources: Bloomberg LLP for market rates as at 30 June 2023. 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 30 June 2023, consistent with the holdings reported in Table A.
• (b) The OBR recently published its own forecast of net transfers from HMT to the APF. See Box 4.1: The lifetime impact of quantitative easing and quantitative tightening, July 2023 Fiscal risks and sustainability. The OBR’s forecast is broadly consistent with the Bank’s approach as set out in Chart 3. However, the OBR’s forecast is based on market data from early February 2023, whereas the Bank’s latest projection in Chart 3 is based on market data from end June 2023. Additionally, the OBR produces its forecast independently and there may be some differences in underlying assumptions. Accordingly, the two projections are not directly comparable.

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. Gilt sales subsequently began on 1 November 2022.
• 28 September 2022 The Bank announced it would undertake purchases of UK government bonds under its financial stability mandate. These were later expanded to include index-linked government bonds and purchases concluded as planned on the 14 October. Sales of this portfolio began on the 29 November 2022 and were concluded on the 12 January 2023.

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 2022/23.
• Asset Purchase Facility Quarterly Report – 2022 Q4.
• Asset Purchase Facility Quarterly Report – 2023 Q1.

ISSN 2041-1936