BOE letter to Treasury Committee: Liquidity conditions were very poor in the run up to gilt intervention

In a letter to Treasury Committee, the Bank of England (BOE) wrote that “liquidity conditions were very poor in the run-up to the BOE gilt intervention.”

Additional takeaways

“The move in gilt yields last week threatened to exceed the size of the cushion for many LDI funds.”

“Market repricing has been largely orderly so far but pressures have been observed in parts of the financial system.“

“But there has not been a widespread crystallization of financial stability risks.”

“Had BOE not intervened, a large number of pooled LDI funds would have been left with negative net asset value and would have faced shortfalls in the collateral posted to banking counterparties.”

“The bank acted to restore core market functioning and reduce the material risks to financial stability and contagion to credit conditions for the UK households and businesses.”

“The bank’s operation is intended to give the affected LDI funds time to put their positions on a sustainable footing, increasing their resilience to future stresses. “

“The bank is studying market conditions and patterns of demand and will continue to use reserve pricing in order to ensure the backstop objective of the tool is delivered.”

“Once the purchase programme is complete, the operation will be unwound in a smooth and orderly fashion once risks to market functioning are judged by the bank to have subsided.”

Market reaction

The pound is little affected by the excerpts from the BOE letter, leaving GBP/USD hovering around 1.1300, at the time of writing. The pair is losing 0.15% on the day.