BOE Repo Facility Fuels Bank Profits from Gilt Carry

Banks are taking advantage of the Bank of England's Short-Term Repo facility to earn profits by recycling cash into UK government bonds that yield more than the funding cost.

The spread between gilt yields and BOE rates has widened, making the trade more lucrative. According to people familiar with the activity, a bank can hand over gilts it already owns to receive cash, allowing it to fund without selling those holdings.

For example, if a £10 billion position is funded at 3.75% BOE rate and receives cash from gilts yielding 5.38%, the gross carry would be roughly £160 million per year. This is before adjustments for hedging, balance-sheet costs, price swings, and other risks.

The BOE said the facility was tapped for almost £129 billion ($170 billion) this week. Adam Dent, Santander CIB's chief UK rates strategist, described the trade as offering positive carry: 'Funding positions in gilts using the BOE's STR does offer positive carry.'