Banks are raising cash through the Bank of England's Short-Term Repo, or STR, and recycling it into UK government bonds that yield more than the funding cost, according to people familiar with the activity. As gilt yields have jumped, that gap has widened to well over one percentage point, making the approach more popular and more lucrative, those people said.
Mechanically, a bank can hand the BOE gilts it already owns to receive cash, so it can fund without selling those holdings. With the BOE's rate at 3.75% and 10-year gilts yielding 5.38%, a simple example shows roughly 1.6 percentage points of carry. On a £10 billion position, that translates to roughly £160 million a year in gross carry, ahead of any adjustments for hedging, balance-sheet costs, price swings and other risks. Adam Dent, Santander CIB's chief UK rates strategist, summed it up: "Funding positions in gilts using the BOE's STR does offer positive carry."
The BOE said the facility was tapped for almost £129 billion ($170 billion) this week. Treasurers at major City of London banks are using it to buy bonds, according to people who requested anonymity, who also said you cannot precisely pin down the total scale of the trade.
Crucially, the central bank isn't treating this as a red flag. It encourages use of its tools for day-to-day liquidity needs. Glen Stone, who leads trading and execution at TreasurySpring, said, "We see use of the Bank of England's short-term repo facility not as a warning sign but more as proof the Bank's new framework is working," adding that more than 70 institutions have now tapped it. Employing these public funds for profit does not breach rules, and the BOE has said it welcomes this as part of liquidity management.
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The BOE introduced the STR in 2022 to handle a foreseeable side effect of shrinking its balance sheet. As the central bank sells down its crisis-era bond holdings and allows maturing debt to roll off, reserves in the banking system fall. If those reserves drift toward banks' minimum needs, lenders could be pushed into money markets and drive market rates above the BOE's key rate. The STR is meant to keep cash available while this process runs.
Officials could make the math less appealing by raising the collateral haircut on repos. Markets also anticipate the BOE will raise its key rate over the next few months because inflation has picked up, which would compress the spread in the example above. Visible profits from this setup could also draw more attention to quantitative tightening, even though the repo program exists to keep liquidity flowing as QT withdraws money from the system. By recently easing the pace of QT, the BOE will probably encourage continued reliance on the STR as banks adjust to thinner reserves.
Activity in the STR has climbed from near-zero early in 2024. Since then, the BOE has lowered its policy rate by 150 basis points, and benchmark gilt yields have climbed by almost as much, helping to create the wider spread that traders are targeting. The increase in take-up also suggests the market is getting over any old stigma around using central bank facilities. "The increased usage of short-term repo and indexed long-term repo is developing as the BOE had envisaged," said Laurence Mutkin, who leads rates strategy for EMEA at Bank of Montreal.
There is a guardrail conversation too. At the University of Reading's Henley Business School, the ICMA Centre's Ivan Sangiorgi, an associate professor of finance, described the STR as a vital instrument for the economy, yet cautioned that if usage keeps rising when market rates sit well above the BOE's rate, it might be a warning sign. "It's something to consider whether this is really good for taxpayer money," said Sangiorgi. "The fact that the volume itself increases doesn't automatically tell us that there are abuses because that's a supply-demand relationship from liquidity demanded by banks." For savers and borrowers, the key takeaway is simple: while this carry remains available, it can shape how readily money moves through the system and where government borrowing costs settle.
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