Bank of England Makes $15 Billion Buying UK Bonds

The Bank of England has made nearly £10 billion ($15 billion) in paper profits by buying UK government bonds as part of emergency efforts to pump money into the British economy.

Sharon Lorimer

The financial shot in the arm – a buy-back program that began in March 2009 and involved purchasing nearly £200 billion in gilts – has generated gains of £9.7 billion for the Bank, according to analysis for the Financial Times.

The gains, which would only be realized were the central bank to sell the bonds back to financial markets at current prices, are a surprising twist in central bankers’ frantic efforts to head off a deeper recession. The Bank’s program – known as quantitative easing– was designed to expand the money supply in the economy.

It bought £198.2 billion of gilts between March 2009 and January 2010.

Few investors at the start of the year expected gilts to increase in value. The view in financial markets at that time was that the UK’s deteriorating fiscal position would drive the yields on government bonds – which move inversely to prices – higher.

But the Bank has profited from big inflows into giltsthis year because of record buying by international investors. They switched out of troubled eurozone debt to take advantage of a weaker pound. The weakening exchange rate made gilts more attractive.

Benchmark 10-year gilt yields have fallen by 20 percent this year to 3.34 percent.

Sterling has weakened about 6 percent against the dollar.

John Wraith, fixed income strategist at BofA Merrill Lynch Global Research, who carried out the analysis, said: “This is a positive side effect for the British taxpayer from the emergency program to buy gilts.

“However, it is important to note that this is just a notional profit. It would only be realized if the Bank opted to sell gilts back to the market, which would likely push yields significantly higher and reduce this profit. We expect them to hold most of their gilts to maturity.”

Profits made by the Bank are in contrast to an estimated £2 billion of gains missed by the UK government when it sold 400 tonnes of gold between 1999 and 2002.

Charlie Bean, the Bank’s deputy governor for monetary policy, has stated that the aim of QE was not to make profits.