The elaborate farce being played out between the Bank of England and the British Treasury

As at September 9, 2026, the Bank of England held £489,026 million in British government gilts (bonds). Since the beginning of February 2022, the Bank has been steadily selling of the stock of gilts it purchased as part of its Asset Purchase Facility (APF) over the period March 11, 2009 to December 15, 2021. These purchases defined its so-called ‘quantitative easing’ (QE) programme that spanned the GFC and the Pandemic as the Bank sought to keep interest rates (and bond yields) at low levels. The so-called Quantitative Tightening (QT) programme that began in November 2022 is now giving the government political problems because it is one of the reasons bond yields are rising. The whole relationship between the Bank of England and the Treasury is an elaborate farce involving transfers back and forth that have no functional purpose other than to disguise the fact that the government is the currency issuer and has no effective financial constraint on its spending. But while the accounting is farcical it does have real world political implications which work against the elected part of government fulfilling a useful public purpose.

You can get the Bank of England’s AFP purchase and sales data at – Results and usage data – which contains all the information for the facility programs run by the Bank,. including the Asset Purchase Facility – Gilt Operations.

At its peak, the Bank of England purchased a total of £895 billion worth of bonds, split between £875 billion in government gilts and £20 billion in UK corporate bonds.

In February 2022, the Bank began what was called ‘passive QT’, which meant that it stopped reinvesting the funds derived from maturing government bonds that it had previously purchased.

In September 2022, the Bank decided to start actively selling its stock of gilts back into the secondary market.

In November 2022, the first auction was held and the programme has proceeded at a pace since then.

By September 2026, the Bank has sold some £400 billion worth of gilts and corporate bonds through its auction process.

The current stock of government bonds held by the Bank is as noted above around £489 billion and falling.

We will examine the consequences of this behaviour further on in the post.

But to see how ridiculous all this really is, consider the following ‘information’ provided by the Bank:

The APF is operated via a subsidiary of the Bank of England known as the Bank of England Asset Purchase Facility Fund (BEAPFF) that is indemnified by HMT. BEAPFF receives interest on the gilts it holds (and corporate bonds it previously held), which were purchased using a loan from the Bank. Interest income is used to pay administrative costs, and interest on the loan. The net balance is transferred between BEAPFF and HMT every quarter.

In case, the quotation above escapes your understanding here it is in simple terms:

1. The Bank of England sets up a desk called the BEAPFF which the Treasury guarantees – let’s call this the ‘left pocket’ of government while we might call the Treasury the ‘right pocket’ of government.

2. It buys and sells government bonds under the APF – left pocket buys from right pocket.

3. How does the left pocket get the funds to transfer to the right pocket? From itself (the ‘loan’, which is paid back to itself).

4. For the bonds the left pocket holds, interest payments flow from Treasury – right pocket sends digital numbers to left pocket.

5. The interest the left pocket receives is paid back to itself (repaying the ‘loan’) and to pay staff, heating and paper costs for keeping the left pocket functioning.

6. The surplus interest after (5) is remitted back to the right pocket every quarter.

7. When the bond matures, the right pocket pays the left pocket the redemption value.

8. If the market value of the bond falls below the redemption value, then the net transfer is from right pocket to left pocket.

Government to government transfers.

The Bank actually wrote a brief information paper to describe and explain this farce – Cash transfers between BEAPFF and HMT.

The Bank went into considerable detail in the first-quarter 2022 Quarterly Bulletin article – QE at the Bank of England: a perspective on its functioning and effectiveness – to explain its quantitative easing programme.

The Bank’s last bond purchase was on December 15, 2021 for next-day settlement and £171 million worth of gilts at nominal value were purchased.

Consequences?

The justification for the QT programme, according to the the House of Commons Treasury Committee – Quantitative Tightening: Fifth Report of Session 2023–24 (published February 7, 2024) – was:

… that shrinking the Bank’s balance sheet in order to create space for future interventions, should they be needed

Think about how ridiculous that explanation really is.

The Bank of England has infinite minus a penny in financial capacity in the currency it issues and it has to ‘manage space’ to buy and sell financial assets denominated in sterling.

The Bank of England is now claiming that the QT programme will generate total lifetime losses of £120 billion, which will be covered by the Treasury under the indemnity that was noted above.

What does that mean?

Essentially, the Bank purchased the bonds when the prices were high and yields low.

Now it is selling them back into a much more uncertain market at a substantial (huge) discount on the face value

The data provided by the Bank allows us to compare the Total allocation (proceeds £mn) – which is the total cash proceeds raised by the Bank from the amount of gilt actually allocated/sold to the Total allocation (nominal £mn) – which is the face value (par value) of gilts allocated.

The difference between them is that the gilts may be sold above or below their £100 nominal value.

The table that follows shows the aggregates since the sales began:

Aggregate	£ million
Total allocation (nominal)	113,531.3
Total allocation (proceeds)	86,335.6
Discount borne	27,195.7

In other words, the Bank has been off-loading the debt at a discount on the face value (the redemption value) of 23.95 per cent.

Which is a rather large discount to be offering to induce participation at the auctions.

What we don’t know from this data is whether the bank paid the nominal value for the gilt at the time of purchase.

So the Bank could have been making a profit or a loss on the QT sales, although it is clear that they have been making nominal losses overall.

By calendar year the data shows:

Year	Nominal value £bn	Proceeds value £bn	Discount £bn	Discount %
2022	6.581	5.999	0.582	8.84
2023	47.082	33.689	13.393	28.45
2024	34.575	25.698	8.876	25.67
2025	11.957	9.974	1.983	16.58
2026 (so far)	13.337	10.974	2.362	17.71
Total	113.531	86.336	27.196	23.95

I then decided to match the gilt sales data against the gilts purchased data using the International Securities Identification Number or ISIN, which allows specific debt instruments to be traced.

While the data does not permit an exact accounting realisation to be reconstructed we can use a weighted-average acquisition cost for each gilt (ISIN).

Here are the results of that exercise:

Aggregate	£ million
Nominal value sold	113,531.3
Estimated acquisition cost	128,522.2
Proceeds of sales	86,335.6
Capital loss	42,186.6

This translates into a 32.8 per cent loss relative to estimated acquisition cost.

The reason the estimated discount calculated above is less is that the Bank mostly paid well above the nominal value for the gilts when it purchased them.

Given that the ‘losses’ are indemnified by the British Treasury, the fiscal transfers are enormous but understate the total fiscal impact given that the calculations above exclude the coupon income that the Bank earned while holding the gilts.

Whatever the actual losses, the House of Commons Treasury Committee reported in the document – Quantitative Tightening: Fifth Report of Session 2023–24 (published February 7, 2024) – that from 2022 the:

… QE and QT have begun incurring a significant loss that is being indemnified by quarterly transfers from the Treasury. Notwithstanding the operational independence of the monetary policy, it strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of public money without any regard to the usual value-for-money requirements. Moreover, the regular indemnity payments count towards the Government’s fiscal rules, with worrying implications for public spending, taxation and borrowing, and for the operational independence of monetary policy.

Within the fiscal logic deployed by the Government, this whole unnecessary process is highly damaging.

It means that the Government thinks it has to be penurious in other expenditure areas as a result of the indemnity payments the Bank receives from the Treasury.

Stunningly ridiculous but the reality is damage is inflicted on the least advantaged citizens.

The other consequence is that the whole exercise is pushing up yields on government bonds.

Given the Government’s Debt Management Office is continually issuing new debt to match the fiscal deficit (it claims it is funding the deficit but it isn’t), the bond auctions must compete with the massive increase in supply that follows the Bank of England sell-offs.

The result is obvious:

1. Excess supply drives down the bond prices.

2. Auctions demand higher yields to absorb the debt being issued.

3. Mainstream economists and the media go troppo accusing the government of excessive deficits and waste.

4. Reform UK gets some more votes.

5. Britain slides further in the marasma.

The estimate of this impact on yields is between 0.25 per cent to 0.4 per cent (Source).

So the Bank (left pocket) is deliberately undermining the Treasury (right pocket) and causing political harm for the government when in reality all of these transfers are unnecessary.

What parallel universe are we living in where this nonsense is not exposed for what it is?

Corporate AI debt also pushing up yields

On September 9, 2026, the US company Amazon AMZN “entered the sterling bond market for the first time … becoming the latest hyperscaler to extend its AI financing to Britain” (Source).

It raised £4.25 billion from this “first-ever sterling bond sale”.

The large AI companies are now seeking large funding supplies from financial markets outside of the US and in doing so are pushing up government bond yields everywhere as investers sell out of the government bond market to chase higher returns in the corporate bond market.

The so-called ‘hyperscalers’ (Amazon, Alphabet, Meta, Microsoft, Oracle) are squeezing out other borrowers including governments by offering higher yields to investors than are available via the government debt auctions

I have seen data where the spread is around 50 basis points and that spread is driving government bond yields up further.

Overall, the 10-year British gilt has risen around 65 basis points this year, most of that due to the inflationary pressures arising from the Middle East War but some of it is the result of the AI boom.

These developments have nothing to do with the fiscal settings (deficits, debt) in the countries concerned.