Pension funds and insurance companies – which tend to invest in long-dated United Kingdom bonds to match their liabilities – rejected the central bank’s attempt to buy £1.2bn of long-dated gilts despite receiving above market level offers.
Advertisement
The best of these include the one-year bond from Paragon Bank, which pays 1.55% and the three-year bond from Al Rayan Bank, which pays 1.88%.
The European Central Bank also faces a scarcity of bonds for its 1.74 trillion euro stimulus programme.
August is already the busiest month for sterling corporate bond sales in more than a year, with Vodafone Group selling two multi-decade notes last week, BMW issuing six-year bonds on Monday and BP said to be marketing securities on Tuesday.
“The pound is the big story today”, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in NY.
Instead, the shock to sentiment, business investment and already-reeling commercial property immediately after the vote to leave pushed the BoE to cut rates last week to just 0.25 percent after holding them at a record low of 0.50 percent for more than half a decade.
There are two ideas behind the Bank buying the bonds: to stimulate economic demand by encouraging the banks and financial institutions selling the gilts to use the proceeds to boost lending to households and businesses or invest in other assets; and to force down the cost of borrowing for the government by increasing demand for bonds, thus increasing their price.
In an effort to cushion the United Kingdom from a potential Brexit-induced recession, the BoE policymakers have decided unanimously to cut rates to 0.25%, from a previous historic low of 0.5%.
The dollar’s weakness gave gold a leg up, with the precious metal gaining 0.9 percent to $1,352.26 an ounce.
“McCafferty really underlined the dovishness of the MPC last week”, said Jane Foley, a strategist with Rabobank in London, she further stated that, “But (reading the BRC data) consumers do seem to have been more robust than many had anticipated and.in the BoE’s minutes last week there were members concerned that some surveys might overstate the downturn”.
The BoE said in a statement that it will “announce its response to the shortfall in today’s uncovered operation at 9 a.m. tomorrow”. Sterling has dropped 1.7 per cent this month, the worst performance among major currencies.
Data from the Bank of Japan showed that Japan’s M2 money stock rose 3.3 percent on year in July, standing at 941.8 trillion yen.
Advertisement
The Bloomberg Commodity Index, which measures returns on raw materials, fell 0.7 percent. “Having reviewed our product range in light of the changes, we have chose to pass on the full 0.25% cut to all mortgage customers on our SVR, effective from the start of September”.
