To help the layman interpret – the chart is telling us that the Treasury now has to bail out the Bank to the tune of around £188bn at today’s 3.5pc 15-year gilt rates.
This is a volatile rate, but there is every chance that it will go up, not down, as the efforts to control inflation are redoubled, and the gilts market itself recognises the very severe fiscal crunch that the UK Government is facing. If gilt rates go up, the bail-out rises.
£188bn is a truly enormous amount of money – dwarfing the Energy Price Cap cost.
The Treasury won’t have to produce the cash immediately, but it will be required to in due course as the QE gilts mature or are sold. What it will have to do immediately is to recognise this bail-out cost in its liabilities – further stretching the already fully-stretched Government finances.
If you intend to hold to maturity it’s normal that you don’t have to mark to market. The most likely run off of these gilts is that they do mature and they’re not rebought. So, crystalising the loss isn’t, in fact, required.
The loss is the loss, of course. But by holding to maturity it becomes more of an opportunity cost loss than one that’s crystallised out…..we;;, that plus the interest differential.