BOE to Press on With Gilt-Buying Plan After Early QE Hiccup

Bank of England's QE Operation Falls Short
  • Central bank makes no changes to gilt-purchase program
  • Will incorporate 52 million-pound shortfall in later purchases

The Bank of England’s plan is to keep calm and carry on buying.

The central bank said Wednesday it will deal with a 52 million-pound shortfall ($60.8 million) in an operation on Tuesday at a later date as it made no changes to its expanded 60 billion-pound quantitative-easing program. Details of these purchases will be announced when the institution publishes information on the second half of the plan on Nov. 3.

The statement came a day after the BOE failed to buy all the gilts it wanted at a reverse auction -- the first such shortfall since it started QE in 2009 -- as investors proved unwilling to part with their holdings of longer-dated bonds.

The miss may have been partly due to thin summer liquidity in longer-dated debt, or even traders being on holiday, which means Tuesday’s issue may be a one-off. The European Central Bank has previously front-loaded purchases under its own QE program to avoid a shortage of available securities during the region’s holiday months. While the BOE’s shortfall was small compared with the total intended program, it may still be an early sign of the challenges the bank may face in expanding QE. 

Challenge Seen

“If they were reasonably comfortable that this was just a one-off, then the natural thing to do would be to say ‘OK, fair enough, I’ll just buy some more today and then we will move on,’” Pacific Investment Management Co. money manager Mike Amey said in a Bloomberg Television interview. “So I think it’s a bit more nuanced than that. And it indicates to us that it’s going to be a challenge to buy these bonds.”

An auction of seven- to 15-year debt on Wednesday saw offers of 4.71 times the amount needed, highlighting the particular difficulty facing the BOE in finding longer-dated gilts. They tend to offer higher yields than their shorter-dated equivalents and are in particular demand from pension companies that hold the securities to match their liabilities.

The gilt purchases are part of a package of measures designed to combat the economic fallout of Britain’s decision to leave the European Union. The Brexit defense, announced by Governor Mark Carney last week, also included corporate-bond purchases and the first interest-rate cut in more than seven years.

At Tuesday’s operation, the central bank received offers to sell 1.118 billion pounds of gilts due in more than 15 years on Tuesday, compared with a target of 1.17 billion pounds.

U.K. government bonds pared their advance after Wednesday’s auction, having earlier sent yields to record lows. The 10-year yield was down three basis points at 0.55 percent as of 3:10 p.m. London time, while the 30-year gilt yield declined nine basis points to 1.296 percent.

“Yields are already extremely low so people are worried about the efficacy of this policy, whether it can really have a bite,” Bloomberg Intelligence economist Dan Hanson said in an interview. The fact “they haven’t said we’ll make up the difference in the auction today might mean they’ve got concerns about liquidity in the market and they’re just going to push the can down the road a little bit and wait until November and reassess.”

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