Banks in London are borrowing billions from the Bank of England through its Short-Term Repo facility and using the cash to buy UK bonds paying a higher rate, pocketing the difference. The spread has widened to well over a percentage point as gilt yields have surged. The cash comes from the BOE's Short-Term Repo, designed to ensure enough money flows in the financial system.

While meant as a backstop, employing public funds for profit is not breaking any rules, and the BOE said it welcomes the use as part of its liquidity management policies. This week alone, it was used to borrow nearly £129 billion ($170 billion), the BOE said. The trade works by allowing banks to pledge gilts they own in exchange for cash, funding themselves at 3.75% to invest in 10-year gilts yielding 5.38%.

On £10 billion of assets, that would amount to about £160 million of annual gross carry before costs and risks. "Funding positions in gilts using the BOE's STR does offer positive carry," said Adam Dent, chief UK rates strategist at Santander CIB.