–Adds Detail To Version Transmitted at 1146 GMT

LONDON (MNI) – Due to declines in the market value of Gilts bought
under the Bank of England’s Asset Purchase Facility, the APF’s debt
holdings showed a marked-to-market loss in the year to February 2010.

In the APF Fund’s Annual 2009/2010 Report, the Fund’s directors
noted that any losses incurred by the APF – the BOE’s vehicle for
conducting its quantitative easing programme – would be covered by a UK
Treasury Indemnity.

The BOE bought stg200 billion of assets, the bulk of which was
Gilts, during the Mar 2009-Feb 2010 period but the fair value of the BOE
APF’s holdings of securities at end February was just stg194.5 billion.
Of this, stg192.8 billion was made up of Gilts, stg1.5 billion of
corporate bonds and stg0.2 billion of commercial paper. The APF also had
cash holdings of stg3.8 billion, due primarily to coupon payments.

The difference between the fair value of the APF’s securities,
coupled with its cash holdings, and the stg200 billion amount – the
total amount of quantitative easing – generates an indemnity or surplus
for the Treasury.

The indemnity due from the Treasury totaled stg1.8 billion over the
period.

The APF Fund – which holds the Gilts and other instruments bought
under the BOE QE programme – is structured so that it never shows either
a loss or a surplus. Any surplus would be returned to the Treasury.

Gilt prices have risen substantially, and yields have fallen
markedly, since February, suggesting the fair value of the BOE’s
securities should currently be back above the stg200 billion level.

Since hitting a late February high, the 10-year Gilt yield has
fallen around 75 basis points to currently trade just below 3.5%.

In the APF report, Fund directors, BOE Chief Economist Spencer Dale
and Executive Director Markets Paul Fisher note that the indemnity
should not be read as implying that QE had had a net negative impact on
the UK public finances:

“…broader factors that are not included in the Company’s
accounts, including the fact that stimulation of economic activity
resultant from the Company’s activities will raise tax receipts, and the
fact that the Company’s purchases have lowered gilt yields below where
they would otherwise be, thereby reducing the Government’s funding
costs, mean that these accounts cannot be used to draw implications for
the overall impact on the public sector’s financial position”.

–London Bureau; Tel: +44 207862 7491; email: ukeditorial@marketnews.com

[TOPICS: M$B$$$,M$$BE$]