Asset Purchase Facility Quarterly Report - 2024 Q3

Overview

This report contains information on the Bank of England’s Asset Purchase Facility (APF) for 2024 Q3, describing operations from 1 July 2024 to 30 September 2024. 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 2024 Q3. 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 2024 Q3, in line with the MPC’s decision, the Bank continued with the sale of the APF’s stock of gilts held for monetary policy purposes. A total of 10 gilt sales operations were run between 1 July and 30 September 2024. These sales led to a reduction in the stock of gilts held for monetary policy purposes of £7.4 billion. Gilt maturities over the quarter led to a further reduction in the stock of gilts held for monetary policy purposes of £26.3 billion (measured in initial proceeds terms). As of 30 September 2024, the stock of gilts held for monetary policy purposes stood at £658 billion, in line with the MPC’s target as stated in the September 2023 MPC minutes.

At its September 2024 meeting, the MPC voted to reduce the stock of gilts held in the APF by a further £100 billion over the 12-month period from October 2024 to September 2025, comprising both maturing gilts and sales. In September 2024, the Bank published the schedule for gilt sales in 2024 Q4.

Summary of holdings

As of 25 September 2024, the total stock of assets held in the APF for monetary policy purposes was £659 billion. The portfolio is now made up entirely of gilts (Table A).

Chart 1 shows the cumulative net value of APF transactions between the establishment of the APF in 2009 and the end of 2024 Q3.

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 legacy corporate bond and commercial paper schemes that have been operated via the APF balance sheet are shown on the right panel.

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 September 2024 was £5.5 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.

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, as well as the net income that had accumulated since the facility’s inception in 2009. 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]}

In line with previous APF Quarterly Reports, 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 -£95 billion.

In all scenarios, the stock of gilts is assumed to reduce by a total of £100 billion in the year to September 2025, 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 2025, in line with the MPC’s approach in the year to September 2023. For both Scenarios 1A and 2A, it is assumed that Bank Rate follows the market path, as of 30 September 2024.

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. 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 bars in Chart 3 for Scenario 1A, while the green and pink lines show the cumulative cash flows in Scenarios 1A and 2A respectively. 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 -£95 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 £50 billion annual sales in addition to any maturities.

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 14 October. Sales of this portfolio began on 29 November 2022 and were concluded on 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 unwind the APF by £100 billion over the period from October 2023 to September 2024.
• April 2024 APF corporate bond portfolio reached full maturity. From this point onwards, the stock of corporate bonds held in the APF was zero.
• 19 September 2024 MPC votes to unwind the APF unwind by £100 billion over the period from October 2024 to September 2025.

Links to additional information related to the APF

Next publication date: 11 February 2025

ISSN 2041-1936