As part of the quantitative easing program announced by Mark Carney last week, yesterday the Bank’s trading desk attempted to buy £1.17 billion worth of long-dated (those that last 15 years or more) United Kingdom government bonds from a group of investors including pension funds, insurance firms and commercial banks.
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The prospect of further purchases of government bonds by the BoE has fuelled buying of gilts by private investors, driving 10-year yields to just 0.52 percent, a quarter of what they were at the start of this year.
LONDON-The Bank of England said Wednesday it plans to make up a shortfall in its bond-purchase program later this year after it couldn’t find enough bonds to buy in a Tuesday auction, an unusual hiccup that analysts say probably won’t become the norm.
USA government bonds continued to strengthen Wednesday, a day after the appeal of government debt was reinforced by a successful auction of three-year Treasury notes and an early stumble in the Bank of England’s efforts to scoop up United Kingdom government bonds.
That’s the theory, but in practice, the reticence of pension funds to sell means that the bank has struggled to execute it.
That compares to a ratio of 2.15 times at the last reverse auction where the bank bought medium-dated debt – bonds with maturities between seven and 15 years.
It’s too early to tell what the European Union referendum will mean for the UKs property market and economy as a whole in the long term, however the Bank of England’s decision to cut interest rates is seen as a last ditch attempt to save the UK’s economy from recession and to inject confidence into mortgage lending and property investment.
Central bank stimulus, concerns about the outlook for global growth and inflation as well as political risk have driven bond yields sharply lower this year, with more than $11 trillion worth of sovereign debt globally offering negative yields.
By buying them, the Bank of England hopes that it will encourage the sellers to spend the money they have raised in ways that boost growth; building new factories or spending in shops for example.
Peripheral bond yields were sliding across Europe, with Spain also hitting an all-time low for its benchmark 10-year bonds.
Investors such as pension funds tend to be buyers of long-term gilts as they are reliable safe-haven bonds which will pay out after a set number of years.
At the time, however, many analysts predicted that the BoE would eventually resort to lowering the interest rate and (re) initiating quantitative easing much as the Federal Reserve did in the USA in 2009. On Monday the bank tried to buy bonds of shorter duration (3-7 years), a much more liquid market.
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He said: “With British businesses suggesting that they are pulling back on expansion plans, the survey is consistent with the general consensus expectation amongst economists that the United Kingdom will experience a mild recession over the next six to 12 months”.
