Asset Purchase Facility Quarterly Report - 2023 Q4

Overview

This report contains information on the Bank of England’s Asset Purchase Facility (APF) for 2023 Q4, describing operations from 1 October 2023 to 31 December 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) operations conducted for monetary policy purposes during 2023 Q4. It also includes information on gilts lent to the Debt Management Office (DMO).

At its September 2023 meeting, the Monetary Policy Committee (MPC) voted to reduce the stock of gilts held in the APF by £100 billion over the 12-month period from October 2023 to September 2024, comprising both maturing gilts and sales.

Over 2023 Q4, in line with the MPC’s decision, the Bank proceeded with the sale of the APF’s stock of gilts held for monetary policy purposes. A total of twelve gilt sales operations were run between 2 October and 11 December. Gilts were sold in equal auction sizes 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). These sales led to a reduction in the stock of gilts held for monetary policy purposes of £13.4 billion.

In December 2023, the Bank published the schedule for gilt sales in 2024 Q1. In 2024 Q1 and subsequent quarters, the Bank will adapt its approach of setting equal auction sizes in order to continue to reduce the APF as evenly as possible across maturity sectors, measured in initial proceeds terms. The Bank will allow the size and number of auctions to vary across maturity sectors on a quarter-by-quarter basis in order to deliver that goal, and will continue to publish its auction calendar in advance of every quarter.

After completing planned sales of sterling non-financial investment-grade corporate bonds in 2023 Q2, the APF continues to hold very short maturity corporate bonds in its portfolio, which 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 27 December 2023, the total stock of assets held in the APF for monetary policy purposes was £744.3 billion, comprising £743.9 billion of gilt purchases and £440 million of sterling non-financial investment-grade corporate bond purchases.

Table A summarises the stock of APF gilts and corporate bonds in 2023 Q4.

Chart 1 shows the cumulative net value of APF transactions between the establishment of the APF and 31 December 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 31 December 2023 was £1.16 billion. Chart 2 sets out the average daily value of APF gilts lent to the DMO via the gilt lending agreement over the past two years.

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.

In 2012, it was agreed to transfer the APF’s net income to HMT on a regular basis. 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 payments have been made on a quarterly basis thereafter.

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

Future APF cash flows are highly uncertain and are sensitive to a number of factors, including changes in Bank Rate. 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 provides an updated summary of actual cash flows to date and illustrative projections into the future. Reflecting the considerable uncertainty around future cash flows, the projections are based on a set of scenarios for the MPC’s approach to unwind, reflecting the MPC’s annual review process, and the path for Bank Rate. These illustrative projections are highly sensitive to the assumptions used.

Since the current value of cash flows further into the future is generally lower than the value of cash flows in the nearer term, the net present value (NPV) for past and future projected cash flows are calculated for each of the scenarios to facilitate a comparison between them. Depending on the assumed path for Bank Rate, the illustrative cumulative lifetime NPVs of cash flows in the scenarios considered fall in the range between -£50 billion and -£80 billion.

In all scenarios, the stock of gilts is assumed to reduce by a total of £100 billion in the year to September 2024, through a combination of maturities and sales, in line with the MPC’s preferred approach to unwind over this period. In the first scenario (‘Scenario 1A’), APF unwind is assumed to continue at this pace in future years until the portfolio is fully unwound. In the second scenario (‘Scenario 2A’), the annual pace of unwind is assumed to return to a total of £80 billion after September 2024, in line with the MPC’s approach in the year to September 2023.^{footnote [4]} For both Scenarios 1A and 2A, it is assumed that Bank Rate follows the market path, as of 29 December 2023.

In line with the approach of previous Quarterly Reports, Chart 3 also includes scenarios in which Bank Rate falls gradually over the coming three years back to a level equal to an estimate of the equilibrium interest rate, produced by staff in 2018 and as described in Box 6 of the August 2018 Inflation Report, and then remains at that level for the remaining life of the APF.^{footnote [5]} These two illustrative scenarios – one for each of the two assumptions of the pace of APF unwind – are shown as Scenario 1B and Scenario 2B.

Projected annual net cash flows are indicated by the purple and orange bars in Chart 3 for Scenarios 1A and 2A, respectively, while the green and pink lines show the cumulative cash flows in each scenario. The difference in the pace of unwind across the scenarios has a minimal impact on the respective net cumulative lifetime NPV. In both scenarios, with annual unwind of £100 billion and £80 billion respectively, the NPV is approximately -£80 billion, as indicated by the red diamond in Chart 3.

Cumulative cash flows for Scenarios 1B and 2B are indicated by the blue and yellow lines respectively. While the NPV of these scenarios is only marginally affected by the differing pace of unwind, it remains sensitive to the assumed path for Bank Rate, albeit to a lesser extent than the simple cumulative cash flows. In both scenarios 1B and 2B, in which Bank Rate gradually returns to an estimate of the equilibrium rate, the NPV is approximately -£50 billion, as indicated by the yellow diamond in Chart 3.

Scenario 3A provides an illustrative projection based on the assumption that the pace of unwind is determined by a fixed rate of annual sales in addition to any maturities.

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

Footnotes

• Sources: Bloomberg LLP for market rates as 29 December 2023. Bank of England calculations for data in relation to APF cash flows. NPV calculations based on end-December 2023 data.
• (a) The stock of assets used for the projection of cumulative cash flows is based on holdings as at 29 December 2023, consistent with the holdings reported in Table A.
• (b) In all scenarios, the stock of gilts is assumed to reduce by a total of £100 billion in the year to September 2024 in line with the MPC’s September 2023 decision. Therefore, ‘Projected annual net cash flow, £80 billion’ and Scenarios 2A and 2B assume £80 billion unwind from September 2024 onwards.

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).
• 3 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.
• 2 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 with an unwind pace of £80 billion by September 2023.
• 28 September 2022 The Bank announced it would undertake purchases of UK government bonds under its financial stability mandate. 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.
• 6 June 2023 the Bank announced that it had completed its sales of sterling non-financial investment-grade corporate bonds.
• 20 September 2023 MPC votes to increase the pace of APF unwind to £100 billion over the period from October 2023 to September 2024.

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 – 2023 Q2.
• Asset Purchase Facility Quarterly Report – 2023 Q3.

Next publication date: 30 April 2024

ISSN 2041-1936