The Bank of England made nearly £4 billion in profit from the pension market intervention that helped bring down Liz Truss’s government.
Threadneedle Street is believed to have made a windfall of £3.8bn after officially ending the emergency bond-buying program it launched after September’s chaotic mini-budget.
The central bank bought more than £19 billion of long-term gilt coins as part of the scheme, saying it had stepped in to prevent the gilt market shock from turning into a wider economic crisis.
At the time, the bank said: “If the dysfunction in this market continues or worsens, there will be a material risk to the UK’s financial stability.”
While the emergency measures calmed investor fears and prevented further turmoil in the pensions market, the financial stability warning also played a role in the eventual removal of Kwasi Kwarteng as chancellor and the eventual defenestration of Ms Truss.
Sir John Redwood, a senior Tory MP, said: “I thought the bond market was destabilized ahead of the budget, first by the Federal Reserve taking a very aggressive line … and then the Bank of England the day before announcing a very aggressive stance and before all while announcing that he would sell many bonds at a loss, which he should not have done.
“It was right to intervene, but it was wrong to allow the market to become so volatile.” And I am pleased that they have now made money from these particular transactions.
The £3.8bn profit will be returned to the Treasury as part of the bank’s three-month turnaround process, The Telegraph understands.
The gilt purchases were made over two weeks by mid-October and Threadneedle Street began selling them in late November.
Buyers paid a total of nearly 23 billion pounds for the bonds, giving the bank about 3.8 billion pounds in profit – a return of about 20 percent.
An obscure strategy known as liability investing (LDI) was at the center of the financial markets crisis, raising fears that many UK pension funds could collapse and forcing the Bank to intervene.
The rise in bond yields as a result of Mr Kwarteng’s mini-budget has led to large calls for cash to pension funds in relation to LDIs, which are derivatives designed to help insulate pension funds from the impact of inflation.
Falling bond values have prompted funds to put in more capital to support their investment positions.
On Thursday, the bank said the bond sales had ended, adding: “The purchases were made to restore proper market conditions following dysfunction in the UK gilt market and thereby reduce the risks of contagion to credit conditions for households and businesses in the UK.”
Separately, an influential group of MPs attacked the International Monetary Fund (IMF) for avoiding parliamentary scrutiny of its comments on UK budgets.
The warning came after the fund made comments to the media criticizing Ms Truss’s mini-budget but refused to appear before MPs.
Harriet Baldwin, chair of the House of Commons Finance Committee, said: “I am concerned that the IMF is in the untenable position of offering comments to journalists but not being prepared to follow up with appearances to elected politicians.
“I will continue to push for senior IMF management to formally appear before the Finance Committee. Otherwise, they should simply limit their comments to the official reporting program and not give intermediate running comments to journalists.
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