The British central bank has been buying government bonds as part of its efforts to stimulate the economy. Investors are looking for return and yield and can not find it anywhere other than the stock market. They’re saying they’ll make up the shortfall, which is actually pretty small so far, over the next six months.
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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.
Although the reason for the shortfall wasn’t entirely clear, it raised the possibility that the central bank might have to pay higher prices for the £60 billion of gilts it is aiming to accumulate over the next six months as it tries to stimulate the United Kingdom economy.
It announced a new £60bn round of government bond buying last week.
Tuesday’s reverse auction was the first time the bank has seen a shortfall since it started QE in 2009, highlighting the difficulty it may face in finding sellers of long-dated gilts that tend to offer higher yields and are in particular demand from pension companies that hold the securities to match their liabilities.
Investors like pension funds, one of the major investors in the long-maturity bonds which were the target of Tuesday’s auction, are holding on tight to their safe assets.
The Bank of England’s plan is to keep calm and carry on buying. It may sound like something under your kitchen sink but it’s standing in the way of an economic recovery.
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App. GBP/USD fell on the announcement and has since trended lower.
A couple of providers have even used the change in base rate as an excuse to make cuts even deeper than that of the Bank of England.
The Bank of England’s decision to cut interest rates was expected to pile on more misery for savers and our analysis reveals just how quickly this has taken effect. That boosted speculation the central bank may need to pay higher prices to purchase enough longer-term gilts to meet its QE target.
People retiring have traditionally bought an annuity – a financial product that promises a guaranteed income for life.
Brent crude is below $45 again today and WTI crude has fallen more than one percent to trade at $42.25.
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Pension funds, the money that is invested to make returns for workers and are then given out once they retire, are among the largest holders of United Kingdom government debt.
