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What next for BOE's gilt market ops?

BOE
  • There are two things we will be watching for from the BOE’s Markets team over the coming weeks. First, the BOE’s Executive Director of Markets Andrew Hauser noted on Friday that the Bank would announce its exit strategy for its temporary holdings of gilts shortly and that it would “try and announce” more information in a “week or two”.
  • He noted that the sales would be from a “demand-led approach guided by market appetite” and that there would be “no binding volume target for sales” – unlike the unwind of the APF programme through its regular auctions.
  • Hauser also noted the Bank was aware of QE-related collateral shortages and that this was one of the reasons the APF active gilt sales were more skewed towards the shorter-end of the curve.
  • We think that the Bank will be focused on the RONIA-SONIA spread – which rose markedly during October (although has come off in the last couple of days). There are a few options that the Bank could consider to alleviate this.
  • It could make its short-dated gilts available via repo, or alternatively it could start to sell shorter-dated gilts back to the market. If it was to chose the latter option it could either do it via a “flexible” programme on the open market (which we think is the least likely, but most desirable option available) or it could modify the existing “short” bucket to include gilts with a shorter maturity than 3-years If it was done via modifying the buckets, this could have the impact of meaning that there were very few gilt sales of longer than 3-years to maturity, unless there was a similar reduction to the bottom-end of the “medium” bucket.
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