Is the Bank of England the most profitable company in the world?

Well the answer is probably no.  Exxon Mobil for example made $19 bn last year, and its profits were over $40 bn in 2007.  We can also debate whether the Bank of England is a company anyway (it says so on the bank notes, but it was nationalised in 1946).

However, with gilt yields continuing their march downward we thought it would be interesting to put an estimate on the returns the Bank of England has generated in the 2 1/2 years following the start of Quantitative Easing (QE). In my back of an envelope analysis I’ve calculated that the Bank is currently sitting on a profit in the region of £32 bn. On an initial outlay of £198 bn, this represents a return of about 16% (roughly 40/60 split between capital gain and income).  On an initial outlay of £198 bn of freshly printed fivers (costs = paper, ink) the return is even better of course.  The highest yield that the Bank bought gilts at was 4.62% on 17 July 2009 (some 4.75% 2030s).  That was a price of 101.79, compared with 119.53 today.

Clearly the caveat here is that if the bank actually tried to realise this profit I’m pretty sure that 10yr Gilt yields would be significantly higher than 2.3%, where they stood this morning.  With more poor UK data out this morning (PMI Services survey only just above the magic 50 mark), the market’s rally today can be at least partly explained by expectations of more QE – there’s an MPC meeting on Thursday, but most expect any announcement to come with the publication of the Inflation Report in November (the usual forum for big policy changes).  Whether gilt purchases are an efficient means of monetary stimulus or not is something we can save for another blog…

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Matthew Russell

Job Title: Fund Manager

Specialist Subjects: Corporate bonds and ABS

Likes: Travelling, gym, reading & pool parties

Heroes: John Nash, John Stuart Mill, Ari Gold

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