Combine all of the ingredients in a nonreactive 2-quart saucepan over medium heat. Simmer until the peppers are very soft, about 25 minutes. Remove from the heat and let steep for 30 minutes, then remove the bay leaves.
Sterilize a quart-size jar and lid. Pour the mixture into the jar and secure with an airtight lid. Store in a cool, dry place for at least 2 weeks before using. Once opened, it will keep up to one month in the refrigerator.
Yield: 1 quart