The ease with which the Bank managed to find sellers for bonds with a maturity of seven to 15 years on Wednesday was in stark contrast to its struggle to attract investors willing to part with bonds with a maturity of 15 years or more the day before.
When longer-dated bonds were sought on Tuesday, the Bank failed to attract the £1.17bn it was seeking.
Before news that the purchase of seven to 15-year stock was 4.71 times covered – meaning the Bank was offered nearly five times as many gilts as it was looking to buy – interest rates on bonds had fallen to record lows on concerns about the effectiveness of the Bank’s stimulus package.
The Bank said on Wednesday it would try to make up the £52m shortfall in future buybacks of longer-dated stock that helped push up the price of gilts, which in turn pushed down their yield, or interest rate.
Yields on 10-year gilts fell to 0.53% and the long-dated 30-year gilt yield fell to 1.29% from 1.37% during morning trading. Gilt yields – an indication of the cost the government pays to borrow – on two and five-year bonds rose slightly after the Bank’s announcement that the latest purchasing operation had been a success.
Darren Bustin, the head of derivatives at Royal London Asset Management, said the Bank had been able to buy only £1.11bn of long-dated gilts – those with a maturity of 15 years or more – at Tuesday’s auction by paying above market price.
Threadneedle Street had wanted to buy £1.17bn as it started the QE purchases that were announced last Thursday when its governor, Mark Carney, governor, cut interest rates by a quarter of a percentage point to 0.25%. It was the first time since QE was initiated in March 2009 that the Bank had failed to find enough sellers, and it said on Wednesday that it would try to buy more next time.
Bustin said the Treasury could be forced to find ways to bolster the economy if the Bank’s stimulus programme did not work, pointing to a possible VAT cut in Philip Hammond’s first autumn statement.
“Today’s announcement has the Bank kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. As quantitive easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution,” he said.
The Bank has six months to buy the £60bn of bonds, and has set out a programme to buy short-dated gilts, long-dated gilts and medium-dated gilts each week. At Monday’s buyback of short-dated gilts the Bank received offers for more than three times the amount it wanted to buy. A reverse auction of medium-dated gilts on Wednesday will be closely watched for the number of bonds put up for sale by investors.
Markus Allenspach, the head of fixed-income research at Julius Baer, said the problem was more likely to be with the longer-dated gilts, which are important to insurance funds. “There is, so to say, an institutionalised demand for long-dated paper which could make it hard for the BoE to achieve its targets for gilt purchases,” he said.
Some analysts caution that it is too early to predict whether the long-dated gilt purchases will continually run into difficulty, pointing to the fact that the Bank has begun QE during the traditionally quiet month of August.
As it launched Wednesday’s buyback, the Bank said it would “incorporate the £52m shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme”.
This article was written by Jill Treanor and Larry Elliott, for theguardian.com on Wednesday 10th August 2016 15.39 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010